March 11, 2009

The Looming Scrap for Petrodosh

Quico says: Here is a story that has been simmering for days and should probably be taken as a leading indicator, a canary in the proverbial coal mine. The state-owned aluminum sector based in the Guayana region of Venezuela has positioned itself for the looming intramural lobbying death-match that will probably consume the chavista governing elite for the next several years.

The aluminum folk opened the bidding at $6 billion, pressing their case for "new investments" to "sustain production levels." Not surprisingly, they are backing their case up with the inevitable, heart-rending statistics: the 10,000 people they employ directly, the 6,000 affiliated co-ops, the 200,000 guayaneses whose economic security is on the line.

Now, I want you to try a little thought experiment. Try reading that story, only not as yourself. Instead, put yourself in the position of an oil union leader from Anaco. Imagine your members have been breaking your balls for months now because the economato - the subsidized union-run shop - is bare because of delays in the government's subsidies.

Or imagine yourself reading it from the point of view of the manager of Caricuao's Centro Diagnostico Integral, part of the Barrio Adentro II program, who's trying to negotiate with the health ministry to hire some extra staff and pay for the repairs of broken-down diagnostic equipment.

Or picture yourself reading it as a clerk working in the Sanitation Department in San Juan de los Morros' city hall. Imagine you are facing unexpected expenses at home because your unemployed son and his wife have to come live with you, leaving you desperate for better pay.

Picture reading it as one of several million people who in one way or another depend on state spending for their livelihood. The government is in a financial tight spot, and it doesn't take much to come to the realization that you are in direct competition with those Guayana aluminum workers for the distribution of the same finite pool of petrodollars.

How do you feel about that story now?

The realities of life under petrostate populism are about to bite for all these people. For all the talk of radical change, the basic outline of the political economy of chavismo is exactly the same as that of every Venezuelan administration since Gómez.

Our economy is still dominated by the state. The state still does only one thing that makes money. The state also pays for thousands upon thousands of things that cost money, from subsidizing people's shopping, to diagnosing their diseases to milling their rice to cleaning their streets to producing the aluminum foil they wrap their lunch in.

Socially, ethically, politically, environmentally - these things are all wildly different in nature. Some are vital, others totally frivolous; some well conceived, others cockeyed.

But from a purely fiscal point of view, they're basically equivalent. A bolivar spent making aluminum in Guayana is a bolivar not spent feeding workers in Anaco, or diagnosing illnesses in Caricuao, or cleaning the streets of San Juan de los Morros. Whatever the relative social and political merits of these activities, they share one basic trait: they cost money. And, as everyone knows, money doesn't grow on trees; it's pumped out of the ground, instead.

So long as the oil revenue stream is growing, the petrostate model "works" - at least in its own narrow terms of keeping constituencies relatively calm. When oil revenues grow year-on-year, the state can give an extra bolivar to the aluminum mill and the union and the CDI and the city hall. Competition between them is attenuated, or at least the perception of it is. And the peace is kept.

The problem arises from this nasty habit oil prices have of going down some of the time. When that happens - as it inevitably must now and again - the petrostate finds itself forced to take some dosh away from the aluminum mill and the union and the CDI and city hall.

That's when all hell breaks loose. Because, suddenly, the CDI manager can see with absolute clarity that if the Guayana worker gets his way, she can't get hers! And the Union leader finds himself under the absolute compulsion to do whatever he can to grab some cash for his economato before the grubby sanitation man can get his hands on it and waste it cleaning streets.

Try as it might, the state cannot satisfy all of their demands. The budget maker's craft becomes a macabre exercise in deciding who to screw only a little bit and who to screw a lot.

The down-part of the oil cycle takes the lobbying contest over the petrostate's budget from a low-conflict, positive-sum game to a high-conflict negative-sum game. In it, you, me and Maigualida the janitor all lose. The only question is who loses more.

At some point along the line, interest groups find that protesting is their best bet in trying to salvage whatever rents they can. And so protest they do. If there's money for Guayana, why isn't there money for my economato? "Es que todo se lo roban!" you shout.

Except, if one group is thinking along these lines, every group is too. Soon enough, the country is on the fast track to some hellish Nash equilibrium, where convulsion over cut-backs is the norm and people wave placards and burn tires to demand a hearing. That's how petrostate revenue retrenchments pass through into governance crises. We've seen this picture a thousand times before.

Again, the state's response isn't really surprising. If you're the government and you have BsF.100 in the kitty and you have 20 interest groups all burning tires in the streets and pledging to keep doing that until you pay them each 20, it doesn't take a rocket scientist to figure out that you're probably going to end up having to call out the Guardia Nacional with orders to lob some tear gas and break a few bones. By the time things get to this point, it's hard to fault the minister who orders the get tough approach. Realistically, what else could he do?

It's been clear for years that we'd end up here, and it's clear now where this is all headed. In Venezuela, sharply increased social conflict and state repression follow oil slumps like night follows day.