Venezuela Manufacturing Crumbles Under Chavez Socialist Push



CARACAS (Dow Jones)--In a recent Sunday television broadcast, President Hugo Chavez showcased one of the latest achievements of his decade-long government: a Venezuelan-made diaper that he hailed as "the first socialist diaper."

"Dear lady, if you want your baby to be more beautiful...use diapers made in Venezuela," Chavez pitched to the camera, holding up the package, which was red, the preferred color of his self-styled socialist revolution.

The diaper factory, which has 34 workers and runs on Chinese technology, has the challenge of producing 144 million diapers a year, or 10% of domestic demand.

Like other government projects ranging from wine-bottling plants to tractor factories, it is part of Chavez's ambitious attempt to build up oil-rich Venezuela's state-led manufacturing prowess.

But the government's channeling of oil income into government-run factories has done little for the manufacturing sector, and production declines played a big part in the country's 2.4% economic contraction in the second quarter.

The bulging roster of state-run factories has also failed to offset the closure of 4,000 manufacturing firms under the weight of Chavez's socialist drive, according to Conindustria, a business chamber for Venezuela's industrial companies.

Manufacturing dropped 8.5% in the second quarter, and has been singled out as the most distressing indicator to come out of the April-through-June data.

Finance Minister Ali Rodriguez said the government is preparing measures to trigger manufacturing growth and boost economic activity.

After expanding a meager 1.4% in 2008, manufacturing declined in the last two quarters as price controls, a fixed-exchange rate system and growing labor unrest shackle investment and day-to-day output.

Among the most glaring obstacles faced by the manufacturing industry is its inability to buy sufficient dollars at the official exchange rate peg of 2.15 bolivars from the government to pay for imported inputs.

The government, low on funds as a decline in oil revenue strains its finances, has drastically reduced the sale of U.S. currency.

The four-year-old peg, which has grown severely overvalued after years of double-digit inflation, has become a curse for companies like General Motors Co., the largest car manufacturer in Venezuela. The company closed its operations for three months after the government denied its requests to buy U.S. currency to pay its foreign suppliers.

It wasn't until the government agreed to sell it currency at the official rate that GM was able to restart operations.

Companies do have the option of turning to the parallel currency market, but then pay around three times the peg, sharply raising production costs.

After the second-quarter data were published, Rodriguez said the government would quickly announce steps to reduce the gap between the official and parallel rate and help manufacturers that need to pay for inputs from abroad. Chavez, however, said any measures would be announced in late September.

Manufacturers, meanwhile, are on tenterhooks.

"If you are a manager right now, your best option is to sit and wait," said Pedro Palma, an economics professor at the IESA business school and former president of the Venezuelan-American Chamber of Commerce.

Adding to the woes are a regulatory labyrinth that includes scores of price controls and the risk of nationalizations or related seizures, which have struck cement makers, steel producers and food factories, among other sectors.

Augustin Diaz, an economist at Conindustria, an association of industrial firms, said "the private sector has come to grips with the political reality" and is freezing investment.

Adding to the woes is labor strife. Unionized workers have become emboldened by the socialist administration, which has demonstrated a willingness to seize companies and sectors, especially those it deems "strategic," such as energy.

Many unions feel the government simply won't allow companies to fire workers, while others would like to see their jobs in the private sector become government jobs that offer more guarantees.

This has spawned an extremely adversarial relationship between management and workers.

In manufacturing sub-sectors such as the automotive sector, "you have a huge problem with absenteeism," Diaz said. "Sometimes up to 30% of the work force each day doesn't show up because they feel their job is secure."

These problems mean that oil now represents 90% of Venezuela's exports, up from about 72% in 1998, the year Chavez was first elected president.

"Venezuelan companies simply can't compete with an exchange rate that should be around 40% weaker," said IESA's Palma. It makes their products much less price competitive abroad, and imports - if you can get the dollars - much more affordable.

Chavez, however, remains undaunted.

"We need at least 20 plants like this one," he said during his visit to the diaper plant. "We need to build a network of diaper plants and we will be exporting them in the not-too-distant future."

You really love this Chavez..

I don't even have to read this message. All i have to do to is simply check the source of report (YANKEE) and the poster (FREDDY) to know it's all propaganda....

I wonder if Freddy gets a check for his efforts??

Lets give everyone a chance of being different and run their country under a different economical foundation. We cannot expect everyone to be aligned with the US. in recent years US and Western world economies have experienced signicant slowdowns, which is something high-ranked american economist haven't been able to figure it out. Let's the world try and search for alternate economic models, at the end of the day China comunism proved to be right.

Carlito the source is the respected wall street journal and economics are numbers so you cant lie Venezuela is in the toilet economically can you or any other person say they are not

Well Venezuela is far away of a lot of nations. Do you forget that Usa,the country you love so much, Use venezuelian Gazz$$?

So What do you know who owns most of the refineries that process Venezuelan oil USA: so what your point Nutty hugo is a comic opera

American hate so much this country they buy refineries on it !

Venezuela is in the toilet. Where's the US?

As I said earlier on another thread, if the venezuelans have elected Chavez as many times as they have done so, then it means that they want the guy on the seat, and NO ONE has the right to tell them otherwise, same thing with the hondurans ousting of Zelaya. I know that we have agreed on a number of issues, Rizzo, but on this one, regrettably, I have to disagree with you. I'm a believer of putting the sovereignity rights of the nations above all else, even if these run counter with the "opinion" of the so called international community at times.