Saturday, November 10, 2012

Chavez's Fairy Tale

Hugo Chavez wants foreign investors to come with their money because there will be no expropriation:

Speaking at a Cabinet meeting, Chavez made light of nationalization concerns, urging businesses not to fear him.

"Come and invest! Don't believe the fairy tale that we're going to expropriate you," he said in comments on state TV.

Once upon a time, there was a president who nationalized quite a few industries, doing so publicly and proudly. That is the fairy tale, which also happens to be true. In fact, it has been a core part of the "revolution." Companies deemed to be working against the state for whatever reason--not producing housing quickly enough, for example, are taken over. Here is a lenthy list of companies he took over. The government itself noted that in 2009 it had nationalized 131 companies. When he nationalized some supermarkets, he made the point that he had a plan.

“This isn’t Chavez going around expropriating any old way, as the bourgeoisie says. There’s a plan here, a strategy, a policy,” he said."

Chavez has given countless speeches on the topic, so it's unclear who he thinks he's going to convince.


Justin Delacour 2:00 PM  

I think an investor would need to see more than what you present here to have a real idea as to what the costs or benefits of investing in Venezuela are. Even if nationalization is a potentiality, a lot depends upon how much compensation the state would be willing give to an expropriated company.

The data indicates that the percentage of the Venezuelan workforce in the public sector is lower than in most countries of continental Western Europe. It still doesn't sound to me like a country where there aren't opportunities for private investors.

Anonymous,  8:44 AM  

Yes, there is not enough here to understand the topic in depth., There is, however, an inkling of what people have been doing for the past 14 years--leaving Venezuela. The exodus of human talent speaks for itself. Likewise, anyone with capital to invest would have to consider the arbitrary legal system under which said investment is not well protected. Unlike Exxon (or any multinational oil company) which can go to international arbitration, a smaller investor is at the mercy of a highly politicized system. Lastly, if you include crime and inflation, in addition to the political and legal and climate, as well as the financial prospects for a profit, the investment climate is decidedly poor. Contrast all these factors with investment in Western Europe and the only areas that Venezuela's risks and rewards might be considered are related to oil and luxury spending by the apparatchiks. Justin's notion that potential investment somehow depends on the level of eventual state compensation is ludicrous. If you are an investor you never want to have this conversation. He then argues a double negative, "it isn't a country where there aren't opportunities." This is hardly reassuring to an investor. I suggest reading an actual report on Venezuela by a financial firm that assess risk based on deploying capital.

Justin Delacour 11:46 AM  

"I suggest reading an actual report on Venezuela by a financial firm that assess risk based on deploying capital."

Well, I find it interesting that neither you nor Greg bother citing any such reports and instead just jump to the conclusion that, because Venezuela has nationalized companies, it must somehow follow that there aren't significant opportunities for investors there.

In addition, you mix up some ideologically-driven talking points with actual analysis. Brazil, for example, has the same level of violence and insecurity as Venezuela, and yet I never hear the talking heads claim that Brazil's problems with insecurity are some sort of grave impediment to investment. Somehow this only comes up in the Venezuelan case. This is not to say that this isn't a problem for investors in Venezuela; it is to say that folks like yourself are likely to be overblowing the problem for reasons that have little to do with what opportunities are actually available.

I don't discount all your points, of course. Concerns about property rights are no doubt an issue for many investors in Venezuela. My point is that any given investor would probably need to examine the specifics of the sector they seek to invest in rather than some broad, ideologically-tinged overview of the supposed business climate there.

boz 12:26 PM  

Brazil, for example, has the same level of violence and insecurity as Venezuela

That would be incorrect. Venezuela's rates of murder and violent crime are about twice as high as Brazil's according to the official statistics of both governments.

Justin Delacour 2:26 PM  
This comment has been removed by the author.
Justin Delacour 2:30 PM  

Alright, Boz, it looks you got me there. I was drawing upon slightly older data, which had Venezuela and Brazil at about 30 homicides per 100,000. It looks like the homicide rates have diverged more recently.

And to be sure, Venezuela has an atrocious homicide rate and not a very serious approach to dealing with it. The last I checked, Venezuela had an incarceration rate about the same as Sweden's, with a homicide rate more than 30 times Sweden's. I've never understood the Chavez government's approach to crime.

Even so, though, I think the point still stands that the people who make the most hay about Venezuela's homicide rate usually have ulterior motives. When other countries without left-populist leaders have high homicide rates, we hear very little about it.

Anonymous,  8:31 PM  

Ok, don't take my word for it. Plainly Venezuela has poor ratings from the big three--Moody's, S and P, and Fitch--aka the ideologically driven analyses. Instead consider how the Japanese, Singapore or, yes, even the Chinese, rate Venezuela as a credit risk.

Anonymous,  8:39 PM  

"...instead just jump to the conclusion that, because Venezuela has nationalized companies, it must somehow follow that there aren't significant opportunities for investors there. "
Justin, undoubtedly there are significant opportunities to profit in Venezuela. I never said otherwise. However, Greg's original post suggested that President Chavez is trying to attract foreign investment and that his government's statements and, more importantly, actions over the last 14 years have led to a loss of credibility with investors. This much is beyond dispute.

Justin Delacour 9:13 PM  

Well, if I recall correctly, some of the major credit rating agencies at one recent point suggested the United States could become a credit risk as well, but I doubt very seriously that gives a potential investor much of an idea as to what kinds of investment are likely to bear fruit (or not). It should go without saying that, whether in the U.S., Venezuela, or anywhere else, a potential investor would need to know more than a Moody's credit rating to make any such determination about the specific sector in which the investor is interested in investing.

Anonymous,  9:36 PM  

Yes, I agree. The US has an ongoing political stalemate that led to a downgrade last summer. Bumpy days are likely ahead as well. Nevertheless, the difference is that the US is a wealthy country and could, theoretically, through budget cuts and increased taxes, significantly improve its fiscal situation. The risk in the United States is substantially less than Venezuela though because the legal, cultural and political climate is better for foreign investors. Despite our budget gridlock, foreigners still buy here and invest in dollars denominated debts. The law protects the rights of investors and the government has never defaulted. The Venezuela risk is not comparable. The risk is more fundamental than a budget deficit.

Anonymous,  9:41 PM  

Venezuela's credit rating is at the level of Bolivia despite a 10 year boom in oil prices.
Maybe the Venezuelan government could accept some responsibility for their own predicament? Brazil, Chile and Mexico all face significantly lower borrowing costs.

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