Cablegate: Venezuela: The Best Is yet to Come

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INFO RUEHAC/AMEMBASSY ASUNCION 0743
RUEHBO/AMEMBASSY BOGOTA 7167
RUEHBR/AMEMBASSY BRASILIA 5842
RUEHBU/AMEMBASSY BUENOS AIRES 1535
RUEHLP/AMEMBASSY LA PAZ 2429
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RUEHQT/AMEMBASSY QUITO 2519
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UNCLAS SECTION 01 OF 02 CARACAS 003653

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TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA: THE BEST IS YET TO COME

1. (SBU) SUMMARY: Two days after the Presidential election,
the BRV instituted several changes to customs and currency
control regulations. The measures included a 15 percent
luxury tariff, price controls on construction materials, and
changes to the list of goods which qualify for foreign
exchange. Taken as a whole, these changes which were
published in the Official Gazette, portend even greater BRV
intervention in the economy and a likely move towards
Prebisch style Import Substitution Industrialization
policies. END SUMMARY.

2. (U) On December 5, the Ministry of Light Industries and
Commerce (MILCO) announced a new 15 percent tariff surcharge
on luxury goods and those considered "non-priority items."
Included among the 200-plus items are: alcohol (including
Venezuelans beloved whiskey), rugs and carpeting, furniture,
jewelry, and toilet paper. This new tax raises the tariff on
most of these goods to 35 percent, which along with the 14
percent value added tax brings the government's take on these
sales to over one third of their price. (Comment: One astute
observer characterized this measure as "selective
devaluation." End Comment.)

3. (U) The Commission for the Administration of Foreign
Exchange (CADIVI) approves most foreign exchange transactions
in Venezuela. For an ever-increasing list of goods, however,
the requester must first get approval from the Ministry of
Agriculture or MILCO to show that the good they are seeking
to import is not produced in Venezuela, or that there is
insufficient domestic production to meet demand. In addition
to being another bureaucratic hurdle for private industry,
this requirement allows the BRV to try to promote domestic
production by restricting imports. The revised list now
includes 3,500 items which do not require separate ministry
approval to obtain dollars while a remaining 5,500 items
still require this certificate of approval. The pre-approved
list is increasingly geared towards primary inputs (minerals,
chemicals, etc.) and capital goods (machinery) destined for
Venezuelan industry.

4. (U) In addition to increasing import taxes on "luxury"
goods and speeding the approval process to obtain dollars to
import goods for industry, the BRV also imposed price
controls on 47 items used in construction, including: sand,
stones, brick, steel rods, wire, wood, metal doors and
frames. The construction sector is booming in Venezuela due
to the oil-fueled economic boom and government policies.
Banks are required to lend a minimum of 10 percent of their
portfolios to construction, and the government has been
funding new schools, homes and infrastructure projects around
the country. Building material prices have gone up
significantly this year and there are shortages of concrete
and other materials throughout the country due to high demand
and a disinclination by companies to invest to increase
production. Fixing prices will only exacerbate the shortages
by pricing the goods below their market rates and creating a
black market where goods are sold at higher rates or with
kickbacks. (Note: interestingly, and in an odd twist, Post
heard that the BRV set the prices for some materials using
the rate contractors charged municipalities which is way
above the market rate. We cannot confirm this yet. End
Note.)

5. (SBU) These changes portend an even heavier government
hand in the market and a state paternalism reminiscent of the
thoroughly discredited Prebisch style Import Substitution
Industrialization (ISI) policies of the 1960s. By taxing
imports and consumption of luxury and finished items while
encouraging the importation of primary inputs and capital
goods (via CADIVI approvals, directed lending and government
support), the BRV seeks to create an industrial base neither

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efficient nor necessarily appropriate for the Venezuelan
economy.

6. (SBU) An over-valued exchange rate is also a tenet of ISI
that makes capital goods cheaper, though in practice has hurt
Venezuelan companies which cannot compete with artificially
cheap imports. The increasing number of government policies
to promote industrialization are occurring as thousands of
industrial establishments close their doors. This irony
appears to be lost on Chavez and BRV officials, who routinely
decry Venezuela's lack of an industrial base while
enthusiastically legislating the country's
deindustrialization. If any lesson is to be drawn from
policies of the last eight years it is that the industries
most likely to have a leg up are those dependent on Chavez,
by way of state ownership or subsidies, and those whose
"politically correct" behavior keep them presidentially
potable.

7. (SBU) COMMENT: These measures, taken only two days after
the elections, offer a preview of 2007. While the government
may expect its policies to incentivize domestic production, a
host of other contradictions (including the over-valued
exchange rate, rigid labor laws, currency controls, a lack of
contract enforcement, a weak intellectual property rights
regime, price controls, and a lack of predictable BRV
attitude towards the private sector) make it more likely that
inflation will accelerate as people pay more for their
ever-dearer imported goods. Price controls -- already
creating distortions throughout the economy -- are likely to
make recurring shortages even worse. END COMMENT.

BROWNFIELD

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