Oil prices are down and that's got Venezuela's Top Thug worried. His Socialist utopia requires bunches of money to maintain.
While the Venezuelan president has caused international controversy with his angry denunciations of the Bush administration, this is where the rubber meets the road for Chavez's radical rhetoric. He is spending billions of dollars on anti-poverty programs, in what experts say may amount to the largest such effort in a developing nation....
"The issues in these neighborhoods are very old fights -- water, land, decent housing," said Andres Antillano, a professor of social psychology and criminology at the Central University of Venezuela in Caracas who has been an adviser to many neighborhood groups.
"For many years, the only relationship with the state was the police. They came here and put everyone against the wall," Antillano said. "Chavez has chosen to gamble on legitimizing these issues. The communal councils are a very serious attempt at grassroots organizing."
The policy appears especially popular in the hard-bitten slums of Caracas -- although as is true elsewhere around the country, the electorate seems divided between a strongly pro-Chavez minority and an apathetic majority....
What is certain, however, is that Venezuela's petroleum export earnings are rising rapidly, and the government is spending the money with abandon.
The government initially budgeted $857 million for social spending in 2006. But as oil money floods in, officials keep increasing the amount. It now stands at $7 billion, although many experts view that figure as a guesstimate of money being spent on the fly.
Public works projects are everywhere, ranging from subway lines in Caracas and Valencia to bridges over the Orinoco River. New medical clinics -- mostly staffed by Cuban doctors provided under Chavez's oil aid program to Fidel Castro -- are within reach of almost everyone in this nation of 25 million people. Illiteracy, formerly at 10 percent of the population, has been completely eliminated, and infant mortality has been cut from 21 deaths per 1,000 births to 16 per 1,000.
Another initiative that could change the lives of millions of poor Venezuelans is a new program aimed at increasing land ownership.
All of which sounds great, and to many Leftists in this country he is a hero and a model for what they would like to see happen in the US.
But all this government spending causes big problems with a country's economy. First, there's corruption
"Chavez is spending so quickly, with such a lack of oversight, through a parallel state apparatus, that corruption easily could spin out of control," said Teri Karl, a political science professor and Latin America specialist at Stanford University.
Suspicions are so widespread that they have become the stuff of popular legend. Virtually every Venezuelan seems to know someone who formed a bogus cooperative in order to receive a large loan from a state-owned bank, then declared bankruptcy and pocketed the money, only to be allowed to repeat the process, milking the government for larger and larger sums.
And Big Government spending results in an economic bubble that creates terrific growth rates; so long as the government has money to spend. With the recent precipitous drop in Oil prices, the spending has to slow. Chavez is trying to counter this by reducing oil production, but that is a trap itself.
Venezuela said Friday it will cut oil production by 50,000 barrels a day to try and stem the recent fall in crude prices and President Hugo Chavez said an "appropriate" price for oil was US$50 to $60 a barrel.
But the oil markets ignored him.
There was no significant response on world oil markets, however. Analysts generally agree that supplies are ample, and the amount of crude Venezuela said it would remove from the market is equal to less than one-tenth of one per cent of global demand.
The problem with Chavez's move is that if does indeed follow through with the production reduction, he gets even less money because he's selling less oil while not affecting the price of oil one cent.
The second problem with Government money driving economic growth is that it produces inflation. And inflation discourages investment.
Venezuela's local-currency debt rally will stall in coming weeks as quickening inflation makes investors less willing to accept lower yields, said Alfredo Puerta, a trader at EconoInvest Casa de Bolsa.
Annual inflation accelerated to a 10-month high of 15.3 percent in September as a surge in government spending buoyed consumer spending and left manufacturers struggling to meet demand. Inflation will probably keep quickening in coming months, eroding the value of the fixed payments on government securities, Puerta said.
And as we know from our own experience, the worst response to inflation is price controls, yet this is precisely what Chavez did.
President Hugo Chavez has made keeping inflation under control a top priority. His government imposed price controls on basic goods in 2003 and has stepped up food subsidies in state-run supermarkets to keep a cap on prices.
What's worse, Venezuela's state-owned refining industry has been allowed to rot. Earlier this year, the country's brand Citgo had to cancel contracts with stations supplying its product because the
Venezuelan energy company could no longer supply due to crumbling productive capacity.
And Americans are leaving the Citgo brand behind because of Chavez's remarks at the UN calling President Bush Satan, including 1800 7-Eleven locations.
But it is unlikely that now is the time for Chavez to pull the plug on Socialism. What with unemployment upwards of 12% and an election coming up.
But there is little doubt, that if the price of oil keeps falling, Chavez will have to choose between social programs and weapons purchases to keep the county's head above water.
