Chavez says he’s doing great, but the Venezuelan economy isn’t

Venezuelan President Hugo Chavez says he feels "great" after another dose of chemotherapy for his as-yet-unspecified cancer. If only the Venezuelan economy was in as good shape as Chavez says he is in. In fact, what Chavez ought to explain is why his vaunted "21st Century Socialism" bears an uncanny resemblance to the garden-variety 20th century kind: replete with widespread inefficiencies, declining production, and rampant shortages.

A new study out, Gestión en rojo (Management in the Red, a play on the ubiquitous color of Chavez’s Bolivarian Revolution), explains why, in part, the Venezuela economy remains in critical condition: Chavez’s excessive confiscation and nationalization of private sector companies.

Convinced that profiteers, speculators, and assorted other chislers have been rooking the Venezuelan people by charging "unjust prices" for their goods and services, Chavez has ordered up the seizure of some 1,000 companies since 2002. In fact, this week, while lying in a military hospital where he is being treated, Chavez demanded that the takeover of land from Irish company Smurfit Kappa be expedited. "We have to take the last square meter of land from Smurfit," he announced on TV. "Let’s move more quickly, that’s an order."

It’s telling how Chavez announces each nationalization with great fanfare, but then never seems to report back to anyone on what becomes of that enterprise a few years down the road.

In Gestion en rojo, three Venezuelan economists did just that, tracking the performances of 16 nationalized companies over a two-year period. The results are hardly surprising: most of the enterprises are running at only a fraction of their capacity and depend on direct government subsidies to maintain operations, if they are operating at all.

According to the lead author, Richard Obuchi, "Government ownership of companies is often accompanied by deficit problems and lack of incentives to be effective and efficient.

Add to that price controls that force companies to sell products for less than their production costs and directives that companies devote resources to overtly political initiatives and you have egregious economic dysfunction.

Chavez’s problem is that he is fast running out of cash to sustain this dysfunction and all of his grandiose spending projects that fuel his popularity. Oil production — his golden goose — is declining, forcing him to borrow at a record pace. (According to Bloomberg, because of Chávez’s anti-market policies, Venezuela already has the highest borrowing costs among major emerging-market economies.)

What all this portends for Venezuela’s presidential election in 2012 remains to be seen, but it doesn’t bode well for Chavez, who, despite his potentially debilitating illness, insists he will run for reelection. It may be that his working and lower class base won’t care much that their country ranks 129 out of 129 economies in the 2011 International Property Rights Index or that it ranks 172 out of 183 countries in the World Bank’s 2011 Doing Business Report (behind Iraq and Afghanistan).

But they will care about the shortages of basic goods, the electrical blackouts, the region’s highest inflation that is cutting the value of their incomes and savings, and the mortgaging of their children’s future that is the result. A reinvigorated Venezuelan opposition promises to focus on those bread-and-butter issues and Chavez will no doubt try every trick in the book to avoid discussing that record. The Obama administration needs to keep a close eye on Venezuela over the next several months, as Chavez — if he remains healthy — will have no qualms about tilting the playing field in an election that is looking increasingly unfavorable.