Venezuela: Alternatives for a Country in Crisis

February 18, 2004

Unedited transcript prepared from a tape recording

8:45 a.m.	Registration
9:00	The Economic Context
	Speakers:	Luis Giusti, Center for Strategic and International Studies
		Desmond Lachman, AEI
		Hernan Oyarzábal, former representative for Venezuela at the International Monetary Fund
		Peter Whitney, Control Risks Group and U.S. Foreign Service Institute
	Moderator:	Mark Falcoff, AEI
10:30	The Political Crisis and Its Prospects
	Speakers:	Ben Allen, National Democratic Institute for International Affairs
		Norman A. Bailey, Potomac Institute
		Miguel Diáz, Center for Strategic and International Studies
		Brian Fox, International Republican Institute
	Moderator:	Mark Falcoff, AEI
Noon	Adjournment

Proceedings:
MR. FALCOFF:  Good morning.  I'm Mark Falcoff of AEI, and welcome to our conference about Venezuela.  We thought it was time to take a look at one of Latin America's most important countries, certainly important to the United States, where, I think most people would agree, there's a gathering political and economic crisis.  I wouldn't say it's a crisis of catastrophic proportions, but it's larger than what you might call [inaudible].  We went from a -- [interruption on tape].

MR.           :  Chavez.  El Presidente.

MR. FALCOFF:  Well, maybe he's going to come by telephone.  But, anyway, what I thought we would do today was, first of all, to invite some economists to take a look at the big picture in a country that produces a major amount of oil, is one of the major sources of oil for the United States, and then there will be a short break, after which we'll have a political panel, which will, I think, be interesting as well.

You have in your folder biographies of the conference participants, so I'm just going to introduce them by name and a very brief comment about them, and then I'm going to ask them to make their presentation in a few minutes, and then we'll have some questions and answers.  The whole idea of this conference is to give you an opportunity to interchange ideas with our panelists.

So, with that, I'm going to ask Luis Giusti to begin.  He's the former president of PDVSA, the state oil company in Venezuela, among many other distinctions.  Don Luis?

MR. GIUSTI:  Good morning.  A pleasure to be here.  Thanks for the invitation.

Actually, there are two  (?)  .  Mark said it.  One is the economic landscape and the other one is the political environment.  I think it's almost impossible to talk  (?)  about anything, including the economic landscape, without realizing that you do have a very strong political backdrop that is going to govern almost everything that happens in Venezuela and has governed everything that has happened so far.

I won't say things that you already know, but I will point out a couple of characteristics of this government in terms of the pragmatic side of government action.  One has been the absolute penetration of the other powers which has killed the separation of powers and has given absolute power to the government, almost absolute power to the government.  The other one is it's been a very exclusive government with all the drawbacks and problems of democracy in Venezuela.

One of the things that was a sign of what happened in Venezuela since democracy was instituted in 1958 is that the different parties, the different sectors, in a way would live along together.  What happens in Venezuela now is this government is essentially trying to annihilate any sector or any person that is not a member, active member of the revolutioners who supported the government.  And that has created a very divisive political agenda, which is what we have seen in Venezuela.

The economy, I could say a lot of things.  I do have an updated information.  But even when some growth is anticipated for this year, probably around 5.9 percent, you have to realize that this comes after a cumulative contraction of almost 30 percent in the first four and a half, five years.  So it certainly will help the life of the average Venezuelan person, but it is coming out of a hole, the beginning, hopefully, of coming out of a hole.

A lot of this will be the result of spending from oil revenues because of the high prices, even when volume is something we're going to talk about.

Unemployment, even when it dropped slightly by the end of the year, still is close to 20 percent official unemployment, and informal employment or what we call sub-employment is probably around 65 percent.  That means about 85 of the working population in Venezuela is without a job.  There's unemployment [inaudible].

Five thousand companies or more have bankrupted.  We have an exchange control that is really choking the business sector.  In fact, I must admire many companies that have managed to survive in a system that does not give them the dollars they require for their activity, while at the same time they have to keep formal accounting.  I've been told that a lot of ingenious accounting is being used in order to keep your books in order while you are not getting the dollars and you have to go to the open market to get the dollars.  And you know the difference between the official dollar, which was recently devaluated, but the rate--let's say the free rate, the open rate, is about 3,150 bolivar per dollar.

Concerning the oil industry, production is around 2.5 to 2.6, and I've read the excellent paper that Mark put together, but I would like to make a clarification there because it says that the government is claiming 3.1.  It's actually claiming about 3.3.  But the opposition is claiming 2.6.  And I must say, being a member, as I am, of the oil industry still, that is not a claim of the opposition.  Those are the numbers that are calculated by the agencies and the companies that do the work.  There's no way today, in today's world, that you can hide or change the production that you actually have.  You have companies like, for example, Petrol- (?)    that have a tanker tracking and can give you the precise volumes that the country is producing--in addition, of course, to the work done by investment bankers that have calculated the volume indirectly from the revenues.  I would mentioned just one example of recent work by UBS that is called "Show Me the Money."  And if, in fact, the Venezuelan production were what the government has claimed, revenues would be about $26.5 billion a year.  It's really close to about $20 billion, and it's because the current production is 2.5 to 2.6.

I really don't know why this is done except--and I can speculate here--just to try to show the world that they don't need the employees, the employees who were fired, because there's no reason for it.  The history, for example, in OPEC, just to give you an indication, is that people claim less volume than they produce because they want to make everybody feel that they're in compliance with the quota.  Venezuela is the only case that I know in OPEC history that claims exceeding the quota when they're about 400,000 barrels a day below the quota.  So that's a strange case.

Another thing that has really marked the oil industry has been the new hydrocarbons law, and I will just point out two things.  That was approved as part of the fast track in December 2001.  Royalty, which was increased to 30 percent from the level of 16.33 that we had for many years, but also there was discretionary power of the government to reduce it when economic conditions would determine that you would want the development but the royalty would not allow for that.  So you would do that.  Now it's 30 percent, and it's unchangeable.  It's actually--it has constitutional rank.  That, of course, kills a lot of projects, including projects like the ones that we advance in the Orinoco belt, in the marginal fields, and things like that.

The second thing that I should point out, because I think it's very important is that in the law one thing was changed, and any joint venture in Venezuela has to have, must have, according to the law, 50-percent-plus equity of the state.  And that is really a project killer in Venezuela because--not because of control, because there are different ways of control.  In fact, in the ventures that we had before, control was guaranteed through different mechanism.  But because in Venezuela, according to the law, when you have a company that is 50 or more percent equity of the state, it falls in the category of something called -- [Spanish] -- which has nothing to do with public companies in the international arena.  It's a company that will require approval of the operational plans and also the financial plans, approval from the Congress.  So it's really unmanageable.  And that's the reason why we're not seeing any joint ventures in Venezuela.  They have come to a halt.  Five years, nothing has happened except milking the projects that we already have.

There is a current desperate campaign, I would call it, to bring in international income.  Companies are very cautious, however, because they feel that the deals that are being proposed may fall in a category that could be contested eventually if they are not changed.

And then, of course, PDVSA has announced plans to spend about $50 billion in the next six years, out of which about half, $25 billion, would come from the private sector.  It's very difficult that that would happen.

Because everything will depend on what happens in the political arena, I will define a couple of scenarios.  And I don't mean to say they are the only ones, but one is the one I call drag-along, which is what we're seeing now--the government meddling in everything that's happening in the process to slow down things, and if we get to the 19th of August, as you know, it will be a meaningless referendum.  That will be one scenario.  And the other one would be that we really get a recall, a recall scenario.

[Inaudible comment.]

MR. GIUSTI:  A recall in which you would get a vote that would eventually remove the President.  So let's say those two scenarios.

We also have sub-scenarios, of course.  One of the things that we see is that we may have a decision that the recall is going to happen and that will happen on the 29th of February.  Chavez already has shifted his position 180 degrees from saying that he will respect any decision by the National Electoral Council to saying that he is going to go to the Supreme Court to contest the decision if it is not favorable to him.

There are other scenarios.  There are people that think that resignation along the way of the process could come about and that would trigger elections.  I think I would refer everybody to Article 233.  I have it here.  I think it's clear that Chavez simply cannot run, even if it's a resignation, after the referendum process triggered by the decision of the National Electoral Council.

A couple of comments, of course.  When you see the march that happened in Venezuela, let's say, the big parade of the people a few days ago, and you see the attitude of the military forces pointing guns and tanks and snipers and everything to the people, there is certainly--the spirit certainly has nothing to do with what we know of democracy.  And if you heard--if any one of you heard the speech of Chavez yesterday, you can understand that, the attitude, the stance that he's taking.  He said that George Bush is responsible for the death in Punta  (?)  on the 11th of April.  He called (?)-asso a liar because (?)-asso clarified that the Government of the United States has supported different NGOs irrespective of their government.

What can we say?  I would finish here and I would stop, and we could talk about this.  And I would be willing to discuss anything with you people.  But I personally think that some of the criticism the opposition has received, for example, saying that, well, you know, the opposition, the only thing that it's doing is attacking Chavez and they don't have a positive message, or they don't have a big leader that can solve this problem for the country.

Well, I think if you try to impeach someone, you do not try to impeach that person because you think you can do a better job than he is doing.  No.  It's because he is destroying the country, because the dialogue has been killed all around.  And I would challenge anyone to look back the five years with Chavez and find along that record any, even small, statement by Chavez which represents some kind of a concession to the right of the opposition or to the existence, the mere existence of the opposition as a valid force in Venezuela.

The spaces that have been opened to opposition are the spaces that some people around the government have been forced to give, like, for example, the Mesa-(?)  -ciones some time ago.  But while the Mesa-(?)  -ciones was under way, well, Chavez's speech never changed.  He was permanently disqualifying the viewpoints and the proposals of the opposition and actually disqualifying the Mesa-(?)  -ciones.  It's been like that with a group of friends.  It's been like that all along the way.  So I don't think that criticism is fair with the opposition.

The second thing, of course, is the big discussion about legitimacy because Chavez was elected.  Certainly he was elected.  The legitimacy of  (?)    would never be under question.  But I think he has delegitimized himself and the government along the way, and perhaps the last straw or the final proof of this is the denial, absolute denial and rejection of the rights of the 3.4 million people that signed the referendum, the right of having and holding this referendum.

There are many things that can be said, and I'm happy to--I'm sure Hernan has a lot of things to say also, and I'll stop here.

MR. FALCOFF:  Thank you very much.

The next speaker is Hernan Oyarzabal, who is Venezuelan economist of some distinction.  You can read his biography in the handout.  He was at one time the Venezuelan representative at the International Monetary Fund.  Perhaps you'll understand in a few minutes why he no longer is.  In any event, we're very happy to have him, and you have the floor.

MR. OYARZABAL:  Thanks, Mark.  Good morning, ladies and gentlemen.  It's good to be here.  I was running on Venezuelan time.  That's why I--

[Simultaneous conversation/laughter.]

MR. OYARZABAL:  Mark asked me to relate a little bit about some of the issues that I see as coming forward on the economic side.  I answered him, I said fine, although I found it very hard to do because of the major issues that are underlying the Venezuelan scene, and Luis has done a very good and able job in presenting to you the major thrust that has--the elements that are influencing all type of activity in the country.

The first thing I would like to say is that, yes, the political scene is the heaviest one, is the one that's playing the most important role in any kind of activity in the country.  Second, to talk about Chavez and not talk about Fidel Castro I think would be a huge mistake.  So I will leave it at that.  There are important links.  There's an important influence.  Chavez has apparently certain ability.  Castro has a lot more ability than he does on the political scene.  And I'm sure that those links are influencing not only what's happening in Venezuela but in other parts of Latin America.

Much of what he has said I would like to emphasize, saying that relating to macroeconomic policy, there has been an increasing centralization of decisionmaking based on the President centralizing the decisionmaking process and also orienting that decisionmaking to the priorities of an ideological [inaudible].  Number two, there's been a consequent loss of transparency [inaudible] oriented towards increasing control.  Of course, discretionality in the allocation of resources and other significant characteristics, that has led, of course, to a loss of control in budgetary management and, of course, there's also a reactive attitude of the fiscal priorities.

Looking forward, I think we have to recover credibility and confidence in the institutions.  Decisionmaking and macroeconomic policy and its implementation has to play an important role.  Many of the major issues, as you will see from what I'm going to try to put as briefly as possible, are related to the handling of the government and what has been happening in the purpose of governing and in the way things have been turning out.

I'd like to focus basically on what policy decisions and issues are relating to what has to be done on the economic scene.

Because of the political influence on all of the economic activity, I think the sequencing of reforms, of decisionmaking, and the possibility of post-Chavez government is extremely important because I believe there has to be a clear sign that the government is returning to a rule of law and establishing a level playing field.  Those are two basic elements that have to be dealt with, not only in the economic scene but, of course, in the political, judicial, and legislative scenes.

I think there have to be in this respect--first, it would be to correct and eliminate the distortions created by the enabling laws which have related to the private ownership and all of the economic issues that were derived from the enabling law which have created and emphasized the issue of centralization, the issue of loss of transparency, and also the important issue of discretionality, all related to a loss of governance and any kind of democratic attitude.

I believe also there is an important element to bring Venezuela forward on the economic scene to emphasize private investment.  Private investment whether domestic--from the domestic sources or from foreign sources.

With respect to domestic sources, I think they will be slow to come.  I think foreign sources of foreign investment will probably come much quicker than domestic sources.

Also, there is a great need to address significant social needs.  There are two elements involved in it.  First, they do exist and they are legitimate--it would be a legitimate issue to address them.  But also from the political standpoint, many of the programs that are being carried out on the political scene, which are basically put in place for political purposes, should be in place to really address the social needs of the constituency.

In any case, addressing those needs will also have an important political stability and add to the possibilities of having success in the political arena, what major activity is going to have to take place.

Going again into the fiscal accounts, they have to be brought under control so that oil revenues in the fiscal accounts, which have reached an incredible level of influence, are brought to a level that can be handled properly, to allow the oil industry to recuperate from the many difficulties it has been facing in the last few years.  We have to look at fiscal sustainability, which has been virtually lost, and the debt management issue has to be managed in a much better perspective, particularly in the way that so much emphasis has been placed on the domestic public debt.

I think there are about five or six major issues that should be addressed here.

First, I believe that the price of hydrocarbons within the country should be brought to more meaningful levels.

Second, I think that public sector tariffs and services should be brought to a more realistic level also, particularly in the area of electricity.

I think also that certain exemptions in the income tax laws and the value-added tax laws should be eliminated to give it a more [inaudible].

The SENIAT, which is the tax collecting agency, should be reformed to create efficiency in tax collection.

There should be an important rationalization of public expenditures aimed at controlling the level of expenditures oriented to the real priority and, of course, also adapting a very important, a very clear wage policy.  Wage policy has simply responded to political whims and thinking and intricacies, politics.  Bonuses and raises have been given out in any which and other way, affecting, of course, the capability of the government to function correctly.

And I think also in my view a new issue which is raising significant concern is that legislation is in the process of being implemented authorizing the states to borrow on their own.  We are going to completely the opposite way than Argentina is going.  We have not learned from the lessons of Argentina.

The second area that I would be looking at in the macroeconomic policy would be the issue of a central bank.  That's an institution very close to my heart, and I pray for a new central bank often.

[Laughter.]

MR. OYARZABAL:  And I would like to emphasize the need to restore its independence and its autonomy.  A central bank cannot be financing government.  That is simply a no-no.  And I believe the methodology of accounting international reserves should be looked at very carefully.  And monetary policy should be basically oriented towards the establishment of good, sound, non-inflationary environment in the economy.  That should be the role of a central bank.

I'm flabbergasted when I open the web page of the central bank, and the first thing that comes out is the social purpose of the central bank.  I don't know whether it's a hospital or it's a school or--but it's lost [inaudible] a central bank, and that is extremely significant in the ambience that we are living in.

Another issue relating to the central bank and also to macroeconomics is the issue of exchange controls.  Now, I happened to be involved in the implementation of the floating exchange rate regime on the 12th of February of two years ago.  And it was really amazing how floating exchange rate in Venezuela never floated.  It was really--well, that's how we arrived at exchange controls.  But now it's very difficult to lift those exchange controls unless two things are basically in place.  One of them, you have under control the fiscal accounts and there's confidence that the fiscal accounts are handled in a proper manner.  Secondly, that there is a return, at least some degree of a return of confidence in what's happening politically, economically, and socially in the country.

Not before those two things are more or less in the scene would I suggest changing the regime.  Where to go is hard to say at this stage, but definitely get away from those exchange controls as soon as these two objectives have been met.

The process of political unrest, recession for so many years, has definitely affected the financial area.  And, surprisingly enough--or maybe not surprisingly enough under a government like this, the superintendency of banks has become less and less effective.  I believe a major thrust has to be made to modernize the superintendency, to return it to its autonomy--return its autonomy to the institution, and also to have it play an important role in strengthening the financial sector.

It's amazing that legally there are public institutions which are not under the umbrella of the superintendency.  They're not held to any type of control.  Now that I think also says a lot with respect to discretionary attitude and the loss of transparency.  And in an area which is extremely sensitive particularly to the payment system, it is important that the superintendency plays the role that it has to play.

There I think there is also additional measures which could be taken, like strengthen the capital base of some banks.  I believe that some banks have to be required to create adequate reserves for their own internal situations that have certain risks, and also address those banks which have been in the very delicate situations.  I don't think there are many important [inaudible] as far as the financial sector of the economy is concerned.  I think it has to be clear that this issue is being addressed to also create confidence in the payment system as well as the financial sector.

I think that there has to be very clear statements made that the role of the state in the economy is going to be reduced and is going to play a statesman's role, not be an active economic player as it has been in the past, in the recent past.  So there has to be, I believe, a reform of certain laws that affect the private sector initiatives and that they return to a motivation of the activity of the private sector, basically those laws that were approved in the enabling law.

In the hydrocarbons law, I think it's important that we have also created an opening to an area of activity which has not been there.  The land law, the fishing and coastal zones.  And I think that it might be extremely helpful also to strengthen that view of the state reducing its participation to become--to continue the process of privatization that had been carried out in the past.  I can think particularly in one company [inaudible] which is Carafe (ph) in the electrical area, which I think would be extremely--would send the right signal and also get much more efficiency in handling it.

I don't want to go much further as far as policy decisions are concerned because I think there's a lot there in what I have said, and I think it pretty well covers a return to confidence [inaudible].  But I cannot forget basically--well, maybe a couple of issues more.

One, issues of management.  Throughout all of governmental activities, there has been a thorough and very deep penetration of people based on an ideological outlook and who have been chosen in an employment criteria called "loyalty."  These are the people who implement, who carry out the different processes that make government work, in this case not work very well.  I think this is something which has to be kept in mind in the implementation of the reforms that have to be taken.

First, how are you going to function, government?  Is that an issue of decisionmaking?  The decisions have to be implemented.  Who is going to be there to [inaudible]?  And what is it going to be--what is it going to mean socially and politically to, well, have these people who are there, who are totally uncapable of handling and implementing government issues or decisionmaking in the political terms?  That is going to be not a very easy task.

I could talk a little bit about the area of security, but I think we'll leave that as maybe a little hook (?) that you might want to raise later on.

The other thing that I would suggest from a management perspective is that we have to return to a formal, institutional coordination of those institutions that work together, begin to work together to implement and--to decide and implement macroeconomic policy--basically the Minister of Finance, the Ministry of Finance, PDVSA, the central bank, and the Ministry of Planning and hydrocarbons.  Those institutions should be working permanently and constantly together in the decisionmaking process and implementation of policies [inaudible] macroeconomic policy.

Now, I want to take a little bit more of your time, if I may, in relating to you the fun that I've had here in the IMF while I was Executive Director for Venezuela [inaudible] Central America.

The relationships with the multilateral organizations that have been carried out by Venezuela I would say have been marked by various issues.  One of them is that the net loan flow has been diminishing in the past three years.  That says something.  It says something about the country, says something about the capacity of the government to implement projects, and it also says something about the multilateral institutions, to keep their eyes open and be careful how they manage the resources of the shareholders.

There's a lack of demand, there's definitely a very weak capacity to implement projects, and, of course, the issue of macroeconomic policy, which one way or another, whether it's the fiscal side or the external side, create the capacity to pay, raise very important issues for these organizations.

With respect to the IMF, I would say that there's been an increasing distance between the institution and the government, or the government and the institution.  There has been a lack of sufficient, timely, and opportune and in-depth information.  The flow of information from the government to the IMF has been slowly reducing.  And it's interesting to see also that the frequency, timeliness, and depth of the discussions between IMF authorities and the authorities--the governmental authorities has also been diminishing.  As a matter of fact, the last Article IV consultation on Venezuela was done in July of 2002, and it's been repeatedly postponed--bad weather, you know, all of these very important things that are being handled down there.  But, in any case, they have not been addressed.  And to sit in those discussions has been a fascinating experience.

I think I know very much about the Orinoco  (?)   access, which is a very important project that is in the mind of our friend the Minister of Planning.  But I haven't learned much more about any of the other issues which are dear to these institutions.

Now, I would like to close also by saying the issue in Venezuela definitely is not a short-term issue.  I think it's a mid-term, medium-term, or long-term issue.  I think that to sit here and blame Chavez for everything or place all the responsibility on him would be absurd and would not be fair.  I happen to strongly believe that there are significant cultural elements which I have been able to identify in the course of my travels to other countries [inaudible] Venezuela [inaudible] and they play a significant role in the way society does behave, and those issues to me are things, are issues that have to be looked at carefully.

I remember talking to Jim Wolfensohn after I left the IMF, and I said, you know, Jim, when you look at the job you're doing here, which I think has been extraordinary, I get very concerned because money doesn't solve a lot of things, and sometimes money doesn't change the behavior of people in the right direction.  And how are you addressing the issue of education, the formation of citizenships, the concern for developing entrepreneurs and risk-takers and innovators and generators of economic activity?  How do you create a better citizen to be participative in the political process in his community, in his organization?  If the World Bank spent some of this money on issues such as that, we'd probably have a much better world to work with and probably would need less resources for people to carry on their own responsibility and would be [inaudible] for their own dealings in a more sensible way.

I'd just like to stop here and thank you for your patience.

MR. FALCOFF:  Thank you very much for that very comprehensive overview.

Our next speaker is my colleague, Desmond Lachman, who is also a former International Monetary functionary but now is here doing national financial institutions and also works with me on Latin American issues.  I'm sure he'll have something interesting to add.

MR. LACHMAN:  Thank you very much, Mark.

I should just start by saying that I very much agree with the two speakers who preceded me whose detailed knowledge of Venezuela very much exceeds mine.  But having looked at the Venezuelan situation for some time, I come to very much the same kind of conclusion as does certainly Hernan in that problems here are deep, problems are certainly of a medium-term nature, and they do not look as if they're susceptible to very easy kinds of solutions.

I thought that what might be a way of going is just to take a look at Venezuela, take a look at the Chavez government over the past five years, and if one looks at what they've done, it might give us some indication, you know, as to where we might be going in the period ahead.

The two things that strike me with the Chavez government in terms of the economic field are, firstly, the abysmal achievements to date that the government has brought about.  The second thing I'd say is the rigidities and the distortions that they've introduced into this economy are going to be very difficult to unwind.

If I just talk about the performance--I'll be really brief, as the items are well known, but I'd just like to highlight a few of the aspects that have been brought about by government intervention by having rules that are arbitrary, subject to change a lot, and basic mismanagement of the economy.  And I'd stress that all of this has occurred at a time that the oil price is in international markets incredibly favorable, and Venezuela is unlikely to have this good fortune in terms of external environment for very much longer, prices of oil being in excess of $30 a barrel.

Just looking at some of the aspects of the poor performance, real GDP declines by something like 20 percent over the past two years, what one has is investment in the oil sector looks like it's not sufficient to keep oil production at the levels, you know, that we've talked about earlier.  Then you look at the social indications.  Unemployment has gone up to 18 percent, something from 13 percent a little while ago.  And in terms of poverty levels, estimates are suggesting that we've gone from something like 21 percent to 33 percent of the population lives in poverty under Chavez's regime.  So this, of course, is polarization that is difficult to get, you know, some sort of economic plan going.

Other aspects that I think are important on the economic side is that we've now got inflation stuck at something like 30 percent at an annual rate, and I'd stress that this inflation is probably repressed, that the inflation would be a lot higher if the exchange rate were set at a more reasonable level and if we didn't have a system of price controls and exchange controls.

And a final point on the economic side that strikes me is that the Venezuelan economy has become increasingly dependent on the oil sector.  The oil sector now accounts for something like 25 percent of the economy's--of the Venezuelan economy, 80 percent of its external revenues, and something like close to half of the fiscal revenue.  So we're talking about an economy that is going to be highly vulnerable to oscillations in the oil price.

Just in terms of if I could turn to the rigidities and the controls that the Venezuelan Government has introduced.  Hernan has mentioned many of the laws and the arbitrariness that we've now got in the way in which the economy is managed.  But you've basically got now exchange controls that have been in introduced that are going to be difficult to unwind.  These were introduced in order to prevent bleeding of international reserves in order to allow the currency to be stabilized at something like 1,600.  We've had a devaluation, and as Luis mentioned, the rate in the free market is more on the order of 3,200 bolivar to the dollar.

Aside from the exchange controls, we've got a vast system of price controls in the economy dealing with something like half of goods in the consumer price index are now subject to control.  This clearly leads to distortions of market signals.  This is going to have to be something that gets unwound.

The last thing in terms of rigidities that have been introduced, and I think possibly the most important, is just the way in which government spending is ballooning, partly in order to ensure that Chavez does well in the forthcoming referendum.  We don't see this so much in the deficit of the government because currently oil revenues are very favorable.  But even so, Venezuela is running a budget deficit of something like 4.5 percent of GDP, and its overall financing need is 10 percent of GDP.  What this is doing is putting great pressure on the central bank to try to do--to sterilize the liquidity coming out of the government.  So what we've got is we've got bond placements that are now something like 90 percent of base money.  And what that's doing is it's increasing the cost to the challenge, is creating quasi-fiscal deficits that are going to be compounding that situation.

At the same time, what's occurring is the government, in order to finance itself, is raiding the central bank.  They've actually had the central bank transfer profits in the amount of something like two points of GDP, and now what they're talking about is they're talking about getting control of the international reserves of the central bank.  This seems to be a big issue in Venezuela right now, and what this would amount to is it would amount to pure monetary financing of the government because the government would basically be selling back the international reserves to the central bank from whom they've taken it.

Where does this lead us as to where Venezuela might be headed?  My view would be that if Chavez sticks around, I think you've got to expect more of the same--the political uncertainty, the arbitrariness.  All of that is likely to be damaging to consumer confidence, business confidence.  What you'll get is you'll get the economy sliding.  You might get a slight bounce, but we're talking about, as Luis mentioned, a decline in output of 30 percent.  So that wouldn't be much of a big deal.
T1B  What I think you would also get is you'd get fiscal irresponsibility, so we'd be stuck in the cycle of devaluations, higher inflation, and this would end very badly.

If there were to be a change in the government, you know, you'd have the prospect of moving along the lines that Hernan has mentioned.  And in that regard, I'd be encouraged by the fact that international reserves are still high--they haven't depleted the international reserves yet--that they've got a very low level of net external debt.  That means that there's room to borrow, and then the international--the multilateral organizations would warmly embrace Venezuela.  So there would be possibilities on the financing side.

Having said that, I think that the task facing any new government is going to be huge.  To unwind the distortions in the economy, this is going to require a stabilization effort.  It's not going to be easy.  It's going to be a long road.  The two things that would bother me is, firstly, the inflation being so high.  Inflation has to be brought down, and that requires an effort.  And, secondly, that the government finances have to be brought under control, which is not easy.

I'd just close by saying that experience elsewhere would suggest that the sooner that one gets onto this path of stabilizing the economy, rectifying the damage, the greater the prospects are that this will be done.  But my view would be that this has to be done in the context of a medium-term program that would be drawing heavily on the multilateral organizations.

MR. FALCOFF:  Thank you.

Our last panelist is Peter Whitney, who is a retired Foreign Service officer and now an academic at a number of institutions, as well as a consultant to Control Risks Limited.  I met Peter, good grief, I think it was about 24 years ago.  We were both younger then, I think.  We've been friends for a long time.  I visited him in Chile and in Argentina when he was a diplomat, and I think he's one of the most well-informed people on the economy of Latin America.  He was economic counselor of our embassy in Chile during the beginning of the great experiment, which, of course, has produced the boom--more than a boom, a sustained period of growth unprecedented in Chile in history, and probably almost unprecedented in recent Latin American history.

Peter?

MR. WHITNEY:  Thanks, Mark.  Since I'm going last, I'm obviously going to repeat a couple of things, but I'm going to try and add a little bit different perspective and do it real quickly.

I have a PowerPoint, which you should have, and when Mark asked me to do this, I took--I figured that, going last, people would make some points about the economy which have been quite well made.  And I share the views of my colleagues here.

But I decided to just go a little further and compare Venezuela with some of the other countries.  Can everybody see?  Or if you can't, you have your handouts.  But what I found is it's worse than I even thought.

Just a couple notes.  Clearly, the worst performance in the region, Chavez elected in '98, so obviously I'm looking at the numbers for '99 to 2003.  Just a brief comment on prospects for this year, and then last is sort of a pipe dream, developments if there were reform, and I think it's highly unlikely because I really--I think Chavez will maintain in power.  The absolute magnitude of the scope of the changes that would be needed, which my distinguished colleagues have mentioned.

GDP growth, I got the numbers for all the countries, and then just computed them out, compound growth rates.  The whole region had a real anemic growth period, as you can see:  5.4 compound throughout the five-year period; Venezuela, negative 16.4, the worst by far in the region, lower than Argentina with its crash.  Per capita, when you add in the per capita, the whole region was negative, so really quite a bad period for the region, and Venezuela, as you can see, was negative 24.

I could say this later or not, but you--I don't know if anybody knows M.D. Chavez, who's a baseball player with the Navigantes (?) team, Navigantes de Marianis (?).  But when he comes up to bat, I understand the sportscasters say, "Here comes Chavez--not the pro-Cuban dictator Chavez, the other Chavez."  Or, "This Chavez hits baseballs but not the Venezuelan people."  I'd love to hear one of those broadcasts.  In Venezuela, baseball is a gas.  If you ever go down there, go to a game.  It's an emotional experience.

Anyway, unemployment, they started--in '98, they were lower than 99 countries, I think someone said 13 percent, and you can see in the last two years only one country in the region had a worse rate.

Inflation took the compound CPI growth for those years, the whole region, 54.  Venezuela was second worst.  The worst was Ecuador, but, of course, Ecuador, that includes their 90--60 percent of the early years, now they've been very stable, single digits the last two years.

The 26 percent or so in 2003, as several people have already said, is quite high considering that the GDP fell substantially in the last two years and that you have extensive price controls and an overvalued exchange rate.  But there, of course, the bottom line is the M2, up a huge amount in the last 12 months.

Real wages, largest decline in the 12 countries of the real wage data sets in the  (?)  data, ECLAF (?) data.

Net external resource transfers in the period, second worst only to Argentina.  Now, my experience in working on these countries is when you get the official net resource transfers at the time, and then you go back five years later, you find that they're a lot higher because I suspect, as we all know, our Venezuelan friends have bank accounts and addresses, mailing addresses in the States.  There's probably a lot more, to the extent possible, coming out.  And, of course, putting on controls, I assume--it's certainly been my case in countries where capital controls are put on, the capital flight just accelerated.

Real effective exchange rate movement, they had the worst total volatility up and down.  If you do the total movements, only Argentina and Brazil had a larger total devaluation, huge black market premium.  The latest devaluation will probably help with the fiscal deficit, but it certainly will fuel inflation.

Now, I have heard talk from several sources about a dual exchange rate.  God help Venezuela if they're going to do that, because I think of Peru--they've tried it before.  I think of Peru under Garcia where they gave the exporters a high rate to favor exports and favored some--favored importers a low rate, with the result that there was 2 or 3 percent cost to GDP, the total GDP.  And I did a consulting contract a few years ago on Nigeria, which was just a wonderful case.  You could put it in an economics text, 22 naira to the dollar for the government and 90 for the rest of the country, and it was just a perfect vehicle for corruption and all the horrible things that we know went on in that country.

Just a couple social indicators.  Fifty-one percent in informal sector, and their wages are a good 60 percent, calculated to be on average lower than the formal sector.

Venezuela has a high literacy rate, one of the higher rates in Latin America.  But there's a huge deficit in technical--I should say basic skills.

Large absenteeism in primary and secondary.  That's not a good sign.  And the primary completion rate, 78 percent in Venezuela, and you can see 96 in Argentina, 71 in Brazil, 89 in Mexico.  And, of course, a big policy initiative of Chavez has been the Bolivarian schools and to import the Cuban teachers.

In higher education, and the typical--this is not only Venezuela, but 35 percent of the budget's on tertiary level, the university level, and at that level only one-fourth graduate in six years.  So there's a lot of opportunity for improving the social welfare spending and administration.

Decades' decline in public health system, and that's well documented, and that goes way before Chavez.  And the poverty and indigence rate you can use--I mean, that's one of the most contentious and misused statistic in economics.  But if you have a consistent series from an organization that tries seriously to do it, you can at least look at trends, and over that period, the latest period I have, that I can find, Venezuela 49 percent poverty, 21 percent indigence, and higher than the Latin American average, which is interesting given its natural resource wealth and its human resource wealth, I would argue.

As a couple of speakers have mentioned, under Chavez the vulnerability of the economy has worsened.  Venezuela has long been sick with the Dutch disease where you have a windfall from a natural resources and it hurts your traded industrial goods sector.  But, of course, they made it worse.  The medicine of nationalization just made the disease much worse.  And in the 1990s, it looked like PDVSA was going to--was changing, with some good management, and the internationalization, the (?)-tura, and obviously some investment in future resources.

I did work on a study comparing national oil companies around the world, and PDVSA was one that got one of the highest ratings in a number of categories.  PMEX was way down the list.  Petrogas(?) was near last.  So there is a--PDVSA has been quite a good company at times.

Under Chavez and Rodriguez, of course, they reversed this strategy to maximize production.  Speakers have already talked about the Constitution and what it did for strengthening the state role in oil and the very pernicious effects of the hydrocarbons law on royalties.  And, of course, Venezuela has re-established closer relations with OPEC and made, according to recent reports, a huge subsidy to Cuba.

The vulnerable economy has also been exacerbated by the severe damage to the private sector.  Exchange rate volatility and controls, which we've talked about.  I've heard it has been used as a weapon against some opponents.  I don't have any case studies, but I have read two reports that say that.

The price controls we've talked about.  There's an allocation of credit, the tripartite agreement between the banks, the central bank, and the government to loan at a certain below-prime rate to certain private borrowers.  So the government has gotten involved in the allocation of credit.

And, clearly, Chavez has taken a very strong anti-free trade stance, anti-FTAA, -WTO.  Average tariff is a little higher than average in Latin America.  They have the Andean Pact restrictions and some other restrictions, so it's not--it's one of the probably more closed economies.  It would be hard to characterize that, but it's certainly not one of the more open ones.

Now, not all the indicators are negative.  Oil prices, as we've shown, he's benefited by very high oil prices.  From 2000 to the present, the price has been higher than any time in the 1990s.

Fiscal deficit, it is what it is.  It's generally lower than the rest of the region, although this year it will be quite different, I think.

Debt-export ratio is lower than most countries in the region.  It has a strong reserve position.

So I think you can say, as has been said here, that the ability to maintain foreign debt repayments and float new issues probably is in the cards for Venezuela.

Prospects for 2004.  Political instability, I would think--my guess is Chavez is going to cling to power because I think the delays, fraud, and the disarray of the opposition, I'd place a bet--they have that thing in--Poindexter's thing out in Vegas, I'd bet that he [inaudible] power.  I'd love to lose my money, but that's where I'd bet.

Expect high growth this year.  I've heard 7 or 8, 5.  It's not hard after severe declines.  You're just climbing up out of the hole you've dug, so that's really unremarkable.

Debt-GDP, some people were talking about it rising to 8 percent, and that would be a net financing requirement of 12 percent or more.  And, clearly, the public sector bonuses at the end of the year, social projects, Chavez will spend a lot of money to try to recover his popularity.

The deficit will be monetized, so you'd predict higher inflation.  And KADAVI (?), the foreign exchange administrative group, is actually--I see is delivering more dollars to the system, and controls relaxed.  So all those will contribute to higher growth than you've had in recent years.

I couldn't mention the prospects for 2004 without mentioning the last item:  kidnappings, carjackings, and armed robberies.  I happen to have a source, work with some people who have very good data on this, and Venezuela is moving up or down--it's getting worse, whichever way you calculate it.  It's not in the league with Mexico and Colombia, but that's not a league you want to be in.  They're working hard on it, and that's a serious problem for working in and visiting Venezuela.

Now, this is sort of--this is a pipe dream.  It's not going to happen.  Maybe it's mid-term, maybe it's a long-term.  But, I mean, to really have Venezuela reach its potential, I just thought I'd throw out a couple, a list of things, and just the list itself tells what a major task Venezuela would have to do.

You'd have to have an initial maxi(?), a return to flexible rate.  I like a crawling peg tied to a basket of currency.

You'd have to end the legacy of Chavez and not only of Chavez but of Oxio-(?)   Democracy and Copay(?) of the greatly bloated public sector, the duplications, the high cost to benefit, and misallocations of resources.  I did a study on the UNDP's program in Latin America with a couple of people, and Venezuela was one of the ones with the most ridiculous loans, 15 percent to certain privileged firms, favored firms, when the going rate in Venezuela was 45 percent.  And you can figure out why certain firms got that.

Deficit to GDP, obviously consistent with a debt-GDP ratio.  Now, that would be something that should be a little easier to do among the other things, certainly have to free prices and let them assign resources, open the economy, and privatization and deregulation.  I'm very familiar with the Chile of the '70s and '80s, and also Argentina of the early '90s, after the first two that were badly done, the ones--the next 15 or 20 were quite well done, and it would serve as a good model.

Certainly have to return to something--Venezuela tried a few years ago to think about some type of a private pension system, and I think Venezuela has to really--you can't even think of these reforms if you don't think of the--I'm struck going back to Venezuela over the years, it seems as a tourist economist that there are more poor people and more people living in absolute miserable conditions every time I go.  And I think you can talk about all the macro stuff you want, but if you don't really make that--in a reform program, the social welfare network a high priority, I don't see how you'd have success or build political support for the other reforms.

I would think an infant nutrition program--infant mortality has been sort of stuck for a number of years at 19 or 20 per year.  Chile's is 10.  The U.S. is 7.  That's deaths per thousand.

Public works program during the transition, it's going to cost money, but you're going to have to do something for the people who are going to be in the streets if Chavez is deposed or leaves.

There's an excellent model for focusing resources that I worked with in the Food for Peace Program in Chile, which I think could be followed.

Obviously--and you can say this about other Latin American countries--some sort of transfer of resources from the university to primary and secondary, and the Constitution says all education is free.  The constitutional change would be hard.

And probably the most important of all would be major, major restoration of the rule of law, transparency.  I put ombudsman, but you need--given Venezuela's history, you need some sort of organization or entity that would really supervise all these changes and build some [inaudible].

Thank you very much.

MR. FALCOFF:  Thank you, Peter.

I'll just ask a couple questions, and then I'll open the floor to our guests.

Luis, I want to ask you this:  Is it true that Chavez right now is being friendlier to foreign companies than to Venezuelan companies with a view to eliminating the Venezuelan private sector, or at least diminishing its size in proportion to the externally controlled sector?

MR. GIUSTI:  It's absolutely true, and it's been explicitly said by Chavez.  And as I said before, there is an open invitation to international companies to come in, and the reason why we're not seeing the companies more interested in getting in--attending that invitation is because there are concerns about what may happen with the kind of deals that are being worked out.

There is a general feeling that any deal that is worked out these days, especially with this sort of free system that in a way violates the existing legal framework, that could be contested in the event of a change in the government.  And I guess that the statements about the Venezuelan domestic private sector are very clear.  He certainly is against that sector.  He thinks that that sector doesn't help his project.  But he can get--if he can get foreign investment and let them do the work and stay quiet and stay out of the political discussion, he's going to be better off.  So it exactly true.

MR. FALCOFF:  What about the impact of the strikes last year on the management of the oil industry?  The government claims, as I pointed out in my article, that, well, all these people that resigned, that's just as well.  The PDVSA was overstaffed with the middle and upper management, and it's better now that the company's actually leaner and meaner than it was.

What would you say about the--what is your view of the quality of management of the state oil company at this point?

MR. GIUSTI:  The Venezuelan legal system imposes that there has to be an interlocutor, a proper interlocutor, and the reason is, differently to other countries around the world, when companies can come in and can get a contract for any kind of legal exploration and production in direct dealing with the government, in Venezuela the law demands that any participation will have to be in joint venture with the government--with PDVSA, a state company.

So along the years, you would require PDVSA being the proper partner for a company in a high-level deal, being the right interlocutor.  That has been lost totally.  The government will go out of their way to claim that the people were not needed.  The real situation is that PDVSA has been destroyed internally.  Capacity of management in terms of almost everything that you can think of-- (?)   production, geology, supply and marketing people that can deal in the international markets are trying to use third parties to work out deals abroad because they don't have the capacity, the finances are in clear disorder.

You can talk to any--not even, let's say, people that sell products in Venezuela.  You can talk to the partners of Venezuelan in private.  They will not come out publicly and say--there's nobody that answers the phone.  There's no way to get a deal.  There's no way to get an opinion.  Nobody takes a stance.  Everybody's looking up to see what's going to happen or what opinion may come from the highest level.

So we are seeing a PDVSA that is a mere shadow of what it used to be, and that is well recognized in the international arena.

MR. FALCOFF:  Thank you.

Hernan, you've talked about the relationship between Castro and Chavez.  I have the impression--this may really more belong to the political panel, but I'll ask your impression anyway.  I have the impression that Castro doesn't give two hoots in hell about the Bolivarian revolution in Venezuela; all he wants is the oil at cut-rate prices.  And, of course, he needs to keep Chavez in power in order to continue to get this very advantageous situation.

But my impression is that there is no great kind of Marxist-Leninist-Castroite scheme for the Venezuelan economy.  It seems to me looking as a Latin Americanist at Venezuela today, it reminds me much more of the early Peron administration in Argentina in the late '40s, where, you know, the state became larger and larger in proportion than the private sector and became more and more of a central actor in the economy with inflationary consequences and so on.

That's my perception.  Would you share that view?

MR. OYARZABAL:  I probably would from an ideological perspective.  Yet social and economic realities have to be put in the context of what Castro wants in the future.  He wants his way of thinking and his way of controlling a society to be maintained.  He is not content with staying in Cuba.  He is playing a very political--a very important political role in all of Latin America.  That has a very exclusive--Venezuela is presently its most significant supporter politically and economically, and it is a way to expand his radius of influence.  That is still there.  I believe that is the underlying issue of his activity.

Yes, I still have to say I've been--I've participated in highly ideological discussions with members of the cabinet in our missions which have been fascinating.  The discourse is philosophical and major [inaudible] writers of Marxist ideology and--it's been fun.  Nothing concrete but it's been basically ideological.  So there's some element there.

But independent of that issue is that I believe when you look at the cultural elements of a functioning of society in Central America--in Latin America in general, you will find that they're very much motivated by--how would you say?--those people who are populists.

Number two, I think they are expecting that many times solutions will come from outside, at least outside of their own personal sphere.  They're expecting government to solve these things.  Sometimes they expect God to solve their own circumstances.  They're not acting in a truly accountable or responsible way in their institutions or in their--within their cabinet.  So they're expecting solutions from the outside.

This is changing a little bit, at least in [inaudible] society, but not enough so that the role of [inaudible] of state is going to be a very major issue.  I think playing on some of these social characteristics and behaviors is an element that is playing a meeting of the minds in this action and this initiative by Fidel to go forward in other--not only in Venezuela, in other countries in Latin America, and a meeting of society.

When my colleague here mentioned the importance of changing Chavez and then changing [inaudible] and then changing Copay, I say, that's great, I agree with him to a certain extent.  I think important reforms are there.  But I believe that we have to go to the individual, because what does society think, what does that gentleman who sells the newspaper out there on the corner think?  What does the guy who's making the coffee out there--that's where we have to go.  That's a substantial difference, and that has not been done, and it's not being done anywhere in Latin America.

There's some study made by some--by a group of gentlemen up at Harvard on the influence on social behavior and--the influence of policies on social behavior, and whether it's important or isn't important, how much of a role is played.  I think changes in policy does affect social behavior.  But if education does not go into the individual everywhere in that society, that ownership of those values that create, establish, and maintain the sustainability of democracy are not in place in everybody in the society, you're going to have a recurrence.  You move two steps forward, you're going to move three steps back.

And this is what we see in Latin America.  I think the only two exceptions in Latin America are Chile and Costa Rica, in effect, what's really driving societies in this political arena.  But I think it's important where the emphasis is made.

MR. GIUSTI:  May I quickly--

MR. FALCOFF:  Yes, go ahead.

MR. GIUSTI:  I wanted to say the following, because the word "ideology" has been mentioned several times.  And I have no doubt that there is embedded in the groups that support Chavez some ideology.  But if you go up to the man himself I don't think there is any ideology there, with the exception of some flirting early in his campaign with  (?)   who have the concept of leader, army, and people, and that was left behind.  What we have here is a man and a system that has an unbridled appetite for hanging on to power and manipulating the system to achieve it.  And he has done it.

And one of the things that he has done, of course, he has appealed to deep resentment that has been there for a long time, people that are willing to go against what they call the middle class and the upper levels.  But I don't think there's too much of an ideology behind Chavez, even when there are some people--Hernan said clearly that when you sit around with them, they'll talk about that.  But I think there is essentially a very clear objective to hang on to power and use all the resources in the country, including the reserves in the central bank.  Actually the macroeconomic stabilization fund, $3 billion were used for the purpose of the revolution.  So that's what you're seeing a lot of.

MR. FALCOFF:  Desmond, what's going to happen to oil prices?  What do you think?

MR. LACHMAN:  I think they are--one would really have to be foolhardy to be able to predict where oil prices are going to be.  I think that there are two issues.  You know, one is the macro forces that might be driving international demand, in my view is--you know, in places like Europe, places like Asia are unlikely to be growing at a rapid rate.  So I would think that there could be downward pressure on the demand side on the oil, particularly when we've had oil prices at this height for so long.

Having said that, one really has to keep in mind that Saudi Arabia has something like 25 percent of oil reserves, Iran has something like another 10, 15 percent.  Oil reserves aren't found in the most stable places on Earth.  And, you know, the idea of a supply disruption to me seems a non-negligible--has got a non-negligible probability.

I would say that in the absence of a supply disruption, I'd expect to see oil prices trend down, you know, towards more like 20 to 25 dollars a barrel, but the notion that you can have a supply disruption--I can't possibly rule out over the next year or two the fact that we'll have another oil price shock that could be very damaging.

MR. FALCOFF:  [inaudible] the floor to questions.  Yes?

MR.           :  Let's get back to oil [inaudible].  Assuming that somehow Chavez [inaudible] can happen, but let's assume that that is going to happen.  How long would it take PDVSA to get up and running again [inaudible]?

MR. GIUSTI:  It is difficult to answer that question because one of the things is that I guess nobody outside knows the kind of damage the company has suffered.  From what I know, I think that we would--in the country--when I say "we," I mean Venezuela.  We would have to think perhaps about a different system.  I don't think we can plan to return to what we had in the past, the kind of PDVSA we had in the past.  Perhaps--and this is just a very preliminary assessment--one would have to create a strong regulatory agency that would create a clear separation between government and policies and the regulation activity, perhaps trim down PDVSA and make it a slimmer company, a more nimble company that would be in a world in which you would open space for--a wider space for other companies to come in, private companies.  And always keep the company--this is good for certain things related to, for example, setting positions in the market.  I don't want to elaborate on that, but I think we would have to think of a different system.

My guess is that Venezuela without Chavez, recovery in the oil sector would be fast, would be relatively fast.  There is very much interest in Venezuela from the oil companies, from the oil world in general.  It's one of the attractive regions in the world.  Companies are struggling to find reserves, so I think Venezuela would be a focus of attention.

And I'll say a word about price.  We are in what's called a backwardation(?) vortex, and because of psychological factors, prices have been very high, abnormally high, and what happens is people are perceiving they're going to go down over time.  And there comes a time when backwardation is--you don't go out of that backwardation problem unless you get a big overhang in crude or a lowering in demand.  I don't think that will happen effectively this year.  I think we're going to see relatively high prices this year.

But there will come a moment of reckoning on the oil price, and I fully agree with Desmond that I think we're going to see perhaps not in 2004 but a significant drop in oil prices as we go along.

MR. FALCOFF:  The next question.  Please wait for the microphone.

MR. DIAZ:  Good morning.  Miguel Diaz.  I have [inaudible] I wonder how much [inaudible] outside of the country, how much [inaudible] the arrival of Chavez.

Desmond, I'm also curious to know why the market [inaudible] I wonder whether they are seeing a political resolution that nobody else is seeing, or what [inaudible].

MR. LACHMAN:  You know, having worked in an investment bank for a number of years on emerging markets, I think I've got some notion as to what's going on.  I'd answer the question two ways.

Firstly, emerging market debt in general is being very well bid right now, and that has got very little to do with the fundamentals of the countries, but it's got more to do with the general liquidity situation which we're in globally.  In other words, interest rates in the United States being at 1 percent at the shorter end, 2 percent in Europe, what investors are doing is they're stretching for yield.  They're investing in anything that's got a high interest rate, and, you know, we get this phenomenon where people get sucked in and you get a boom in--or a bubble in emerging market debt.

Having said that, generally, you know, that that would explain why debt prices are well bid all over the place, Venezuela--the market would look at Venezuela in a rather skeptical way.  They aren't too interested, you know, that Chavez is destroying the country or that the country's not growing, et cetera.  All that they do is they make a rather simple calculation:  How much debt does Venezuela have and how much international reserves does Venezuela hold?  You know, and that math right now, Venezuela's only got something like $20 billion in external debt and it's got international reserves of around about $17 billion, so that the market says what is the risk, you know, Chavez has got absolutely no incentive to default on the debt.  And I think there was recently a placement of Venezuela debt that was substantially oversubscribed, largely because of those two conditions.

So I'd say, you know, it's a question of the liquidity driving emerging market debt in general, and then Venezuela, you know, from the fundamental--all that people are saying is Venezuela has clearly got a capacity to pay.  Chavez, on the willingness side, you know, you're dealing with somebody who's irrational, but you don't think that he's so irrational that he's going to do something that really doesn't serve his long-run purpose.

MR. FALCOFF:  Anyone want to take a stab on the capital flight?

MR. WHITNEY:  I think I would just guess it's higher than the numbers of net external resource transfers that [inaudible] had because I've seen in past cases that five years after a situation like this, they always increase the number.

MR. FALCOFF:  Any other questions?  Yes?

MR.           :  [inaudible].

MR. GIUSTI:  I wish I could go more in detail because I'm afraid I really don't know what has been done or how it has been done.  I know they were changed, and I believe that the changes that were made were not focusing or aiming at internationally accepted accounting principles.  And that has been the result of the support and, you know, translations of these earnings that accounting [inaudible] of the central bank has created to support financing [inaudible]

MR. FALCOFF:  Thank you very much.  We'll have a five-minute break, and then we'll have the political panel.  Thank you all.

[Recess.]

MR. FALCOFF:  We're going to resume the political panel now.

Let me start the political panel by explaining that we had four people originally scheduled.  I had asked representatives of the two party foundations, the National Democratic Institute for International Affairs and the International Republican Institute, to participate because both of those institutes, along with a number of other NGOs from the United States and Europe and Latin America are active in Venezuela in monitoring the process [inaudible] for so long.  And both accepted.  And then last week, late last week, the Democrats got cold feet, and yesterday I got a phone call, and the Republicans got cold feet.  And the reason, as I understand it--and they've told me I'm perfectly at liberty to explain this to you--is that they are working under very difficult conditions in Venezuela and they felt that anything that they might say here might be held against them and make their work more difficult.  And, in fact, I read a statement by Vice President Rangel, I believe yesterday or the day before, accusing outside organizations and NGOs of trying to destabilize Venezuela, and this morning in the papers, President Chavez is accusing the United States of not only being behind the coup of 2002, but also helping continue opposition attempts to overthrow him.  I presume things like monitoring the process of gathering the signatures on the petition calling for a referendum constitutes an attempt to overthrow him.

In any event, I had no choice but to accept the withdrawal of those two party representatives, so our panel is only two people instead of four people.  I'm sorry about that, but there was nothing we could do about it.  It all happened too late for me to make any substitutions.

Our first speaker is my colleague Miguel Diaz, who is head of the South America Project at CSIS, our neighbor and Hollywood friend, I think, and we've worked together on a number of things, including a study group that he had done in Venezuela.

Miguel?

MR. DIAZ:  Thank you, Mark.  I also have cold feet, but it has to do with the weather, and that's why I've got my sweater on, so excuse the informality.

MR. FALCOFF:  Quite all right.  We're all [inaudible] here.

[Laughter.]

MR. DIAZ:  I was going to start by basically asking you the question:  What do you think first when you think about Venezuela?  And I guess what comes to my mind are three things:  oil, beautiful women, and soap operas.  And to me the Venezuelan political drama is like a soap opera.  Just when you think there's going to be a happy ending, there's a new twist, a new [inaudible] comes to bear and it changes the whole drama, and the tension just keeps going and going and going, like the rabbit in the commercials.  The tension in Venezuela has just been sky high for a number of years, and I just don't see it abating any time soon.

It would be--one has to be extremely humble in trying to predict what's going to happen in Venezuela, and I'm going to stay away from [inaudible] predictions.  But I do want to basically present some viable options as I see it, maybe suggest some thoughts on how I see the long-term picture, and maybe finally make some comments on U.S. policy in Venezuela.

The reason I think it's very difficult to predict what's going to happen in Venezuela is--there are four in my opinion.  One is that all the leaders on both sides say--they dwell on hyperbole [inaudible] exaggeration that are very inconsistent.  I happen to agree with comments made in the last panel about Chavez not being terribly rational.  I don't think he is extremely balanced [inaudible] I spent some time with him, met him twice.  And the second time I met him I was in Caracas with a group of former dignitaries, and we spent three hours with him, and he spoke for two hours and 50 minutes for those three hours, and I just left saying to myself this is not a rational person.  How can you sit with him in a room meant for informal discussion and [inaudible] speak for two hours and 50 minutes?  I just don't think he is an extremely--I don't think he has an ideology.  I don't think he is all there.  I think he does [inaudible] grandiose illusion about himself and his [inaudible] in the world.  And that makes it very hard to obviously appreciate or guess what's going to happen in the country.  But it also presents danger because we don't know what to expect from somebody like Chavez.

Two, unfortunately, there isn't a transparent, evenhanded media, so you cannot rely on the media to try make sense of what's going on in the country.  We've been working with the media, posted 19 media representatives from both sides here in Washington not too long ago.  Amongst the rank and file, I did sense that there was a hope to rescue that profession from the politics of it, but, unfortunately, the one thing I perceived [inaudible] going back to Venezuela is that their coverage of the situation in Venezuela remains as polemical and as politicized as it was prior.

I do think there's hope there, we have something to work with in terms of working with the media, but, still, I don't think they're reliable in terms of presenting what exactly is going on in the country.

I have to admit that maybe I am also a little too close to the situation and I do wonder to what extent it affects my perception of what's going on.  I grew up in Venezuela.  I have family there.  It's a big family.  There are 12.  And to a large extent, I basically use them as my own little poll of what's going on in the country, and I will revert back to that when I make some comments about what I think is going to happen in the country.

As I see it, there are basically three political scenarios that I see taking place.  I think Chavez's preferred scenario would be to basically clamp down.  I do think of him as an autocrat and as a bully, and if it were up to him and he could get away with it, I think he would basically close [inaudible].  I think he's been looking for an excuse to do that.  In fact, many suspect that there will be--that the government was going to use the march this weekend, in case there was any violence that erupted from the march, to do exactly that.  Fortunately, the opposition did not lend themselves to that opportunity, and for the time being things are fine.

But on the side of the opposition, there are still elements who are, in my view, undemocratic, who are susceptible to the temptation of doing undemocratic things in order to take power away from Chavez.  And I think to a large extent Chavez's is [inaudible] and it's still there, still a concern.

The scenario that I want to dwell on--and I guess here I depart from the general conception that there won't be a referendum or an election in Venezuela--I do think there will be referendum or some kind of electoral solution to the Venezuelan crisis.  I think Chavez has tried to buy as much time as possible, complicating the referendum process.  He will come up with other loopholes, other kinks in the process, but basically, as I see it, he's trying to buy time and use that time to buy his way into the hearts of the Venezuelan voters.

As Desmond noted, he's spending a lot of money.  He is behaving like a candidate.  He's doing a lot more public speaking now than he has before.  I think it is within his grasp to actually--maybe not necessarily survive a referendum, but I think he has an easy chance of winning an election against any of the--many opposition candidates.  The fact of the matter is that Chavez, compared to his--to those in the opposition who are perceived as presidential candidates, he's a much better campaigner.  He is charismatic.  [inaudible] but he's still charismatic.  So I think he has a chance of surviving on an electoral basis.  In fact, I think he hurts himself by basically trying to blame things on everybody else and bully his way to postponing the referendum.  I think if he were just to kind of tone down his rhetoric and keep on spending, I think he has a good chance.

Let me go back to my family and why I think--and how I rationalize Chavez being, I guess, possibly successful in an election.

As I said, I use my family as a political barometer, and there are 12, I have 12 cousins in Venezuela.  And they're pretty much evenly divided right now between Chavez and the opposition.  These are former middle-class people, doctors, lawyers, former employees of PDVSA.

Two of them have switched recently in support of the government; whereas there were four Chavistas in the past, one of them happens to be Chavez's Ambassador to Mexico [inaudible] Ambassador to El Salvador, and he's run into problems there.  But you have the hard-core Chavista in the family, and then you have these two new converts.  And the reason they became converts, interestingly enough, in my view, was that they felt that the opposition--they were economic elite were terrible irresponsible in basically calling for the strike, leaving them to the whims of the markets to fend for themselves.

After two or three months of looking for employment, they found jobs working for the government.  And as a result, and given the very politicized nature of anything in Venezuela, they feel somewhat obliged to support the government.  So you've got two newcomers simply because the government was able to give them a job.  When you're trying to survive and feed a family in Venezuela, that's a big bonus.  That's something that you want to hold on to, and I think it's made a difference here.

Chavez also is, I think, playing the anti-American card, and to a certain extent, that plays well in Venezuela, though you mentioned before about his repeated accusations of CIA involvement, and the most recent accusation is that the State Department is directly supporting opposition, civil society organizations.

I think he's, you know, prone to pick any fight with any outsider, preferably a U.S. outsider.  But it does carry some political benefits in Venezuela.  You know, this is--maybe this is what he's learned from Cuba, this ability to create crises and perpetuate a sense of crisis, a sense of victimization, that I think basically serves him well.  He is, you know, for the majority of Venezuelans who--when you look at the numbers, everybody--the majority of Venezuelans are really excluded people.  You have the political elite.  You have what was left of the middle class, which was already kind of dwindling by the time Chavez came to power.  And then you have everybody else who's basically trying to survive.  Amongst those people, playing the anti-American card still makes sense.

The last option, as I see it, is basically to change the venue or the front of the conflict from the CNE, where it currently is, to the Supreme Court.  Obviously he has opened up that opportunity, that venue over the weekend by saying if the CNE rules against me, this is what I will do.  I think, in fact, he was also signaling to the CNE that they could probably get away with saying there is enough signatures to have the referendum.  So, I mean, he's provided an opening of some sort, and I think that's--I think that's what's in the making.  But he will try to prolong the referendum process still, as long as possible, but if it goes against him, I do think he's going to be true to his word and take up his fight at the Supreme Court.  He's already introduced legislation, I believe, to increase the number of Supreme Court Justices to 32, I believe.  I don't know where that is in Congress, but it's something that I expect his congressional supporters to pick up some time soon.

Let me just reflect a little bit on what U.S. policy is in Venezuela and whether it makes sense.

I think the policy--and I think most people would agree with me right now--is that of keeping a low profile in Venezuela.  You have the current Ambassador who has basically been made a lame duck by deciding that he's only going to be there until June of this year.  You have the Ambassador from Chile who's scheduled to arrive I think around that time.  So as it is, you have an Ambassador in Venezuela who's very much a lame duck, so I don't think--that reflects a certain disposition on our part to basically keep a low profile.

You know, we've got Peter DeShazo, the Deputy Assistant Secretary, who has made a trip or two to Venezuela already.  He's been publicly castigated, in the press at least, by Chavez for his involvement, and I think it reflects again, I guess, the dangers on our parts to be more engaged at the moment in Venezuela.  I think the moment for intervening publicly is when hopefully--or, unhopefully, the CNE will make a decision.  If at that point there is reason to believe that there is some fraud that took place, maybe that is the point that the U.S. should intervene in conjunction with the other countries of the Friends of Venezuela Group.  But for the time being, I do think it makes sense for the U.S. to keep a low profile.

Let me just conclude by offering some thoughts on what I think is going to happen after Chavez, and I think I share the concern amongst those who spoke before about the situation in Venezuela remaining in crisis for a long time to come.  This political divide is not going to be bridged any time soon.  They just simply don't talk to each other.  They talk across each other.  The leadership on both sides--and, unfortunately, on Chavez's side, you only still have Chavez.  There isn't anybody else really behind Chavez that makes for a good interlocutor with the opposition.  You have Chavez, his very loyal supporters, and everybody else.

And then on the side of the opposition there is still--you know, they claim that they're willing to reach out, but I'm not--in Venezuela itself, they're not making that much of an effort still to do so.  You still have to go to the barrios and you still have to attend to these people and establish that kind of relationship.  It's very easy to come down to Washington with a group of journalists of the opposition and make friends over nice dinners.  But in Venezuela, where you have to take risks, political risk, personal risk, to do that kind of bridge building, that's still not taking place.

There is the legacy of crime in Venezuela.  Somebody pointed it out before.  You have a criminality problem in Venezuela unlike anything you've seen before.  And you don't address these issues very quickly.  It will take a very, very long time to disarm the Venezuelan society to get those organized criminal units to be caught.  It's simply a monster of a sort that's been created over the last couple of years that will take a very, very long time to address.

There is still, in my view, in Venezuela--and there will be for a very long time--a lack of fair brokers in this political debate.  The church, the media, even political parties have lost the ability to serve as bridge builders.  You don't rebuild these institutions overnight as well.  I think it will take a lot of work, a lot of effort, a lot of investment for that to happen.

Right now the sole, I guess, brokers in Venezuela is the international community.  You know, you have the Carter Center and the United Nations and you have the OAS.  But I also question their commitment in the long term to keep up with this kind of work.

I already noted, for example, that in terms of the coverage of the situation in Venezuela, there are now less reporters in Venezuela than there were a year or two back.  The Wall Street Journal took their reporter and--well, he actually left, and you have a new reporter covering Venezuela from Mexico.  You have some of the few regional newspapers who were covering Venezuela just not covering it anymore.  So if nobody hears and reads what's going on in Venezuela, I gather it's going to be a little bit more difficult to sustain the kind of international involvement that we've seen up to now.

And, lastly, I still don't see anybody offering any real economic strategy for dealing with the long-term problems of Venezuela.  You need a strategy and then you need the political will and the political support to introduce and implement that strategy.  And when you look at the congressional makeup right now and how divided Congress is, I just don't see the political support there for any kind of full-court, aggressive attack on the real structural economic problems of the country.

I'll finish there.

MR. FALCOFF:  Thank you, Miguel.  Thank you.

I think now I'm going to ask Normal Bailey to comment on the wider hemispheric implications of what's going on in Venezuela.

MR. BAILEY:  Thank you very much, Mark, for this invitation.  I appreciate it.

I wasn't going to say much about the internal political situation because I assumed that my three colleagues were going to cover that quite thoroughly.  That ended up being one colleague.  I will make the following very quick comments about the internal situation:

I do not presently believe that Chavez has any intention whatsoever of permitting a revocatory referendum.  He's going to delay it.  He's going to do anything he has to do to make sure that it doesn't take place, or if it does take place, it will be after August when he would be replaced, if he loses it, by the Vice President, which amounts to the same thing.

The President of Venezuela under the Bolivarian Constitution appoints his own Vice President, which means that if Rangel takes over after August, he can appoint Chavez Vice President and then he can resign and Chavez would be President again.  I mean, that's a perfectly feasible way of handling the situation.  And there wouldn't be an election then until 2006.  Or he can leave Rangel there if he wants to because Rangel is a puppet and says and does whatever Chavez tells him to.

The CNE has already violated its own rules.  It is not announcing anything when it was supposed to announce it.  One of the members of the CNE has announced that he's not going to go to the CNE office anymore because when he goes in and out, he is threatened by the Bolivarian mobs in and out.  So it's a question of whether CNE is even going to be able to function.

If it does finally decide that there were enough valid signatures to have a referendum, Chavez has already said he's going to appeal it to the Supreme Court.  That could go on forever and ever and ever.  I mean, if anybody has ever had a case before the Venezuelan Supreme Court, you'd better make provisions for your old age by the time it's going to come up for a decision.

Secondly, Chavez is becoming bolder and bolder in repressing the opposition.  The most recent example of that was the march in September when there was a really impressive security display on the part of the government in terms of Army, National Guard, and police, including tanks.  They were kept away not only from the presidential palace, they were kept away from the CNE office.  Luckily, there was no outbreak of violence, one of the reasons, of course, being that there was an extremely powerful security apparatus.

Chavez is now playing hardball.  It's not softball anymore.  It's hardball.  And he has every intention of continuing to do that until he has every string of power in his hand.  And please don't tell me about the fact that he was elected in a free and honest election.  Adolf Hitler was appointed Chancellor of Germany by President Hindenberg after a free and honest election in Germany.  President Fujimori of Peru was elected in a free and honest election and proceeded to destroy pluralism in Peru.  The fact that somebody's elected does not mean he has a--he or she--I don't want to be sexist about this--has a writ to do anything he wants to after he is in office.

Thirdly--and then I'll stop here and go into the hemispheric relations aspect--Chavez is engaging in a very thorough purge of the armed forces.  Not a single questionable officer at this point at the higher levels commands any actual troops.  I mean, all troop commanders, as opposed to people who sit around in offices at desks, are Chavez incondicionales, unconditional supporters of Chavez, and that's true both in the Army and in the National Guard.  And only the Army and the National Guard count in this respect.

When the worst coup plotter in the history of the universe became President for 24 hours in April of 2001, in a coup d'etat that could serve as an example, a model of how not to do a coup d'etat, one of the big mistakes that he made--and he made several--was that he appointed admirals to all the important positions.  Admirals can't do anything for you when you're staging a coup.  What are they going to do?  Sail ships up the Orinoco?  The Air Force and the Navy don't count.  What count are the National Guard and the Army, and they're about the same size.  I mean, the National Guard is very important.

Also, part of the big security apparatus last Saturday was the Bolivarian circles, who are becoming larger, stronger, better organized, better armed, and so on.  So you not only have almost full control at this point of the Army and the National Guard, you also have armed civilian supporters that are being carefully trained by Cuban trainers, among others, in Venezuela.

Okay.  Hemispheric relations, and here I am going to make nine points about what Chavez and Venezuela mean for hemispheric relations at this point.

Number one--and these are in no particular order of importance--Chavez's involvement in Andean/indigenous relations.  The largest concentration of indigenous peoples in South America, of course, are in the Andean region.  That's particularly true in Bolivia, Peru, and Ecuador; to a lesser extent in Colombia, and to a rather minor extent in Venezuela.  Chavez is a strong supporter, both verbally and financially, of the indigenous movements, particularly in Ecuador and Bolivia.

These movements are anti-American, they are anti-globalization, they are anti-free trade.  Chavez is anti-American, anti-globalization, and anti-free trade, and he has money to play around with, and he does it extensively in the area.

In the case of Colombia, of course, Chavez is a supporter of the groups that are trying to overthrow the Colombian Government, namely, the FARC and the ELN.  There is absolutely no question of this.  This is not a matter of debate.  He supports them, not particularly financially because they don't need any financial support.  FARC is by far the best financed and richest insurgent movement in the history of the world.  But he certainly provides them with the necessary logistic support on the Colombian border and the Venezuelan border with Colombia, and a safe haven.  They have really two safe havens, the other one being in eastern Panama from the Colombian border, but that's not because the Panamanian Government supports them.  It's because the Panamanian Government has absolutely no control of the Darien Peninsula.  In the case of Venezuela, the Venezuelan Government could do a better job of controlling the border.  It doesn't want to.  And, in fact, quite the contrary is true.

Secondly, Chavez is actively promoting a populist/leftist axis in South America.  I don't call it an axis of evil because that would be giving them too much dignity.  These are pipsqueak populists.  Any of you who have read "Paradise Lost" or "Dante's Inferno" realize that there is a certain grandeur in absolute evil, and none of these people is anywhere near the level of a Saddam, a Kim Jong-Il, or an Ayatollah Khomenei.  But they are dangerous, and he is in that process.  He, of course, has the full support of Fidel Castro, who is part of this axis.  He has the support of President Kirchner of Argentina.  And, of course, the great prize would be Lula in Brazil, and that so far hasn't happened.  But everybody on that side is working as quickly as they can or as effectively as they can to bring Lula on their side, too.

My personal view is they probably will not succeed.  Brazil is still much too much of a pluralist society.  It depends much too much on the international trade and financial markets for Lula to join in any kind of--other than rhetorical fashion from time to time, this particular axis.

Nevertheless, Chavez is looking to the future, Chavez and his allies, to people such as Evo Morales in Bolivia, whom he fully expects and supports to become President of Bolivia and to join the axis and bring Bolivia into it, and he may succeed at that; people like Tabare Vasquez, the perennial leftist candidate in Uruguay, who has an excellent chance of winning.  And Chavez as well as Kirchner have openly supported both Morales and Vasquez, and anybody else who shows up who is likely to be a candidate for this.

My personal choice for the next country to be a candidate would be Peru.  President Toledo's popularity is down to 7 percent.  He has just shuffled or reshuffled his government for the fifth time.  Luckily for Peru, no Evo Morales has shown up yet in the indigenous groups in Peru.  In my opinion, it's only a question of time.

Chavez is anti-free trade and -globalization.  He is openly against the Free Trade Area of the Americas.  He is openly in favor of setting up trade blocs in South America, which would be contrary or in opposition to the United States and the Free Trade Area of the Americas.  And in this, he does have an ally in many of the people around Lula and possibly in Lula himself because Brazil has led an effort, both in the WTO, the Doha Round, and in the FTAA, to create a grouping.  But the Brazilian idea is that the grouping will not just be in Latin America.  It will be worldwide--India, China, Brazil, and other countries.  So that's quite a different situation.

Chavez is anti-American.  He is now and he always has been.  I know a very great deal about his past history.  I have dossiers two and three inches thick about from the time he was in the military academy in Venezuela.  He hates the United States.  He wants to do damage to the United States to the extent that he dares to do that.

Chavez uses oil as a weapon in terms of supporting Cuba, and incidentally, I do not believe what somebody said in a previous panel, I do not believe that the only reason that Fidel supports Chavez is because he gets low-cost oil.  I believe Fidel supports Chavez for that reason, but he also supports Chavez because Chavez is a wonderful troublemaker.  And Fidel, who failed 40 years ago in creating a revolution throughout Latin America, is thinking now that he is approaching death's door--which hopefully will happen very, very soon--that he might have another chance to do that and Chavez is his chosen and willing instrument.

Chavez recently excoriated the Dominican Republic because it refused--and withdrew its oil concessions in the Dominican Republic because the Dominican Republic refused to extradite Carlos Andres Perez to Venezuela.

Sixthly, or seventhly--pardon me--Chavez is interfering in interstate disputes in South America.  He is openly supporting Bolivia against Chile in its salida al mar dispute with Chile.  So is Kirchner, who incidentally is involved in two ways in Bolivia:  one, supporting Evo Morales, and when he was in Santa Cruz, he refused to meet with Mesa, the official President of Bolivia, but he met with Evo Morales; and then he supported Bolivia's pretentions to an outlet to the sea, and did other absolutely wonderful things.  But we're not talking about Argentina here, we're talking about Venezuela.

In Central America, Chavez is providing financial support to the FMLN in its electoral fight there.  Luckily, the FMLN is divided so that it is unlikely that Shafik Handal, who is a very dangerous person, is unlikely to win there because the FMLN is divided.  But Chavez is doing his best.

He is providing support to the Sandinistas in Nicaragua, and the Sandinistas have a very good chance of winning the next presidential elections.  I presume their perennial candidate will present himself again, Daniel Ortega--although I don't know that, but that is my assumption at this point--because the Liberal Party is divided.

Finally, but by no means the least important, Chavez is harboring and supporting Middle East terrorist groups in Venezuela who are headquartered in the Isla Margarita as well as on the mainland right across from Margarita.  And these are groups that are headquartered in a building that's built like a fortress, that has armed guards with automatic weapons outside all the time.  These are not rumors.  These are facts provided by, among other things, photography.  And they are there primarily, at least up to this point, as far as we know, primarily to collect funds.  And that, of course, is not the only place.  There's also Mikao(?) in Colombia, the triple frontier region between Brazil, Paraguay, and Argentina; the Colon (?) free zone in Panama.  There are other places, but generally there are places where at least if they don't have the official support of the government in the case of Venezuela, they are protected by the government.

Okay.  That ends