COMPETING ECONOMIC PLANS: CHAVEZ AND ROSALES

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 003296

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: DECL: 11/01/2016
TAGS: ECON PGOV PREL VE
SUBJECT: COMPETING ECONOMIC PLANS: CHAVEZ AND ROSALES


CARACAS 00003296 001.2 OF 003


Classified by Economic Counselor Andrew N. Bowen for reason
1.4(d).

--------------
SUMMARY
--------------


1. (U) Consensus opposition candidate Manuel Rosales released
his "Proposal for Change toward a New Social Democracy" on
October 25. This platform details his populist economic
plans for distributing the country's oil wealth to the
neediest through "Mi Negra" debit cards, respect for private
property, public works projects and an important role for
foreign and private sector investment. While Chavez has not
published an economic platform, through assumptions made in
the proposed 2007 budget and his public addresses, it is
clear that he intends to continue with large public outlays
while simultaneously increasing the state's role in the
economy and thereby opportunities for BRV patronage.

--------------
THE BETTER HALF
--------------


2. (SBU) Consensus opposition candidate and Zulia governor
Manuel Rosales has repeatedly emphasized the importance of
private property and considers it a fundamental value that
the state must protect. At the same time, many of his
prescriptions are very populist in nature and demonstrate his
focus on Venezuela's impoverished classes. Attracting
investment seems key to the Rosales platform and it
demonstrates a clear understanding of the pre-requisites for
investment: macroeconomic stability, an efficient and
transparent judicial system, clear and predictable rules of
the game, personal security, a limited bureaucracy and above
all protection of private property. (Comment: Transparency
and efficiency are sorely lacking in the BRV and Venezuela is
ranked 164 out of 175 countries for ease of doing business
according to the World Bank's Doing Business in 2007.
Venezuela lies between Egypt and Burundi in this survey. End
Comment.) Improving the business climate (through actions
such as the elimination of the labor solvency requirement and
numerous other BRV measures which hamstring the private
sector) would encourage firms to invest and foreign direct
investment (FDI) to return to Venezuela.


3. (C) The centerpiece of Rosales's economic plan is the
debit card called "Mi Negra." This card, which the campaign
is starting to distribute across Venezuela, would go to
around 2.3 million Venezuelan households in poverty. (Note:
Mention of this part of this program received the loudest
applause at the October 7th Rosales "Avalanche" march. End
Note.) A national census would define the levels of
participation. In addition, Mi Negra would be available to
the recently unemployed, with an emphasis on combating youth
unemployment. (Comment: A recent discussion with the Rosales
campaign demonstrates that the plan is not entirely thought
out and an advisor admitted to econoffs that it remains to be
seen how they would wean people off of the debit cards and
promote self-sufficiency. End Comment.)


4. (SBU) Mi Negra participants would receive monthly
disbursements based on Venezuela's oil revenue. It would
replace some of the missions and other hand-out programs in
favor of direct distribution. Rosales claims this will
eliminate much of the corruption and political victimization
currently affecting who receives social benefits in
Venezuela. According to Rosales campaign estimates, the
monthly stipend would range from 600,000 to 1,000,000 Bs (or
USD 280 to USD 465). This works out to USD 6-10 billion
annually, though the plan calls for distributing only 20
percent (currently about USD 6 billion) of Venezuela's oil
income in this manner. (Comment: While it is clear that many
of the BRV missions are inefficient (literacy program Mission
Robinson costs USD 500 per student, making it the most
expensive literacy program in the world) it is difficult to
determine the actual value of Mi Negra or its economic
viability beyond its populist appeal. Estimates are hard to
come by, as missions are funded by the regular budget,
off-budget funds and via PDVSA, but one economic consultancy

CARACAS 00003296 002.2 OF 003


puts BRV spending on the missions for 2006 at around USD 7
billion. According to Central Bank (BCV) statistics,
Venezuela's "official" revenue from oil for 2006 will be
around USD 29 billion (including income from royalties, taxes
and PDVSA dividends and spending). End Comment.)


5. (U) A Rosales administration would work to improve
macroeconomic policies, including restoring BCV autonomy. An
improvement in BCV governance would allow the government to
deal more effectively with inflation and currency rate
fluctuations as well as improve banking sector control and
oversight. At the same time, Rosales plans "massive public
investment" to stimulate private investment in sectors such
as construction and tourism (that require lots of workers) as
well as to create training institutes and microcredit
programs to promote small and medium enterprises.


6. (SBU) Rosalses has also promised to create a Medicare
program for people over 65 years old, build 1.5 million new
homes, launch a massive effort to improve the country's
infrastructure (including USD 1.8 billion for the electrical
grid) and create incentive programs to hire new employees,
especially youth and single mothers. (Comment: As with most
any political campaign it is doubtful that he can keep all of
these promises. The housing deficit (currently in excess of
1.7 million) and crumbling infrastructure are long-term
problems that Chavez has failed to address, despite being in
office for eight years and enjoying record high government
revenues. End Comment.)

--------------
MORE OF THE SAME
--------------


7. (SBU) What Hugo Chavez lacks in specificity, he makes up
for in verbiage. The Chavez campaign has produced no
economic plan for his re-election bid and our efforts to meet
with campaign officials have been spurned. The 2007 budget
proposal (septel) implies that spending priorities will
remain the same for the next year with moderate increases in
spending and the majority of spending devoted to social
expenditures. The budget proposal represents a 32.4 percent
nominal increase over the original 2006 budget (inflation is
expected to be around 15 percent in 2006),though a 11.2
percent nominal decrease when compared to the current 2006
budget with all subsequent additional credits. Starting
November 1 the BRV will begin to pay out the annual bonus to
1.6 million public sector workers, which this year will
constitute 3 months additional salary and is expected to cost
the BRV USD 3 billion (or 1.9 percent of GDP). (Comment: The
bonuses are normally paid out in December, but Chavez
announced that they will be paid early (this week),before
the elections. End Comment).


8. (SBU) Chavez has repeatedly stressed the importance of
domestic production, known in the BRV as "endogenous
development." At the same time the over-valued exchange rate
encourages importation over production, and it seems likely
that he will continue, if not increase the importation of
capital goods and machinery for state-owned enterprises. The
BRV will complete several major infrastructure projects (such
as the new bridge from Caracas to La Guaira, the opening of
line 4 of the Caracas metro and the second bridge over the
Orinoco river) and probably announce several new projects
involving roads and trains. Venezuela and China recently
announced a USD 6 billion investment fund (2 from Venezuela
and 4 from China) to construct a railroad, highways and
housing. (Comment: This deal and potential future deals
demonstrate Chavez's belief that state-sponsored and directed
investment are the primary means of achieving his economic
goals. Similarly, he maintains that the government will ease
the housing crunch through state housing construction. It
hasn't worked so far, the housing deficit (now at 1.7 million
homes) has increased by 45 percent during his tenure. End
Comment.)


9. (U) PDVSA will likely continue to transfer "excess"
revenues (currently USD 100-120 million per week) to the Fund
for National Development (FONDEN),and it is likely that BCV
reserves in excess of the "appropriate" amount (USD 28-29

CARACAS 00003296 003.2 OF 003


billion) will also be transferred to FONDEN next year.
FONDEN will continue to fund social expenditures, including
parts of the missions as well as infrastructure investments
and Bolivarian financial largess (for example Argentine
bonds).


10. (SBU) The missions will remain the primary means for
providing subsidized staples (Mercal),social services
(Barrio Adentro, Mission Robinson, others) and combating
unemployment. The latest BRV unemployment figures, showing
unemployment at 9.5 percent, are highly deceptive, as people
who work more than 1 hour a week, including in the informal
sector, or participate in Missions are not considered
unemployed by the National Statistics Institute. All these
programs foster dependence on the BRV rather than creating
sustainable unemployment. An increased focus on community
councils, which as un-elected ad-hoc groups bypass local and
state governments and receive funding directly from the
executive, will detract from overall efficiency and improve
the BRV patronage machine. (Note: The community councils
were created in April 2006 and have been authorized up to USD
650 million this year. The budget for 2007 authorizes USD
1.4 billion. End Note.) Additional missions may be
announced, such as Villa Nueva which is designed to increase
housing construction.

--------------
COMMENT
--------------


11. (SBU) Chavez's campaign lacks a platform or even much in
the way of campaign literature, other than to promise more of
the same. His omnipresence on television and in the press is
event oriented and the BRV seems focused on producing
projects (or at least announcing them) to stay on the front
page. The recent inauguration of the train from El Tuy to
Caracas a few Sundays back is a good example. The grand
opening was covered live on most television stations for
hours and was accompanied by a fireworks celebration that
rivaled New Year's Eve. What was less well covered was the
fact that the transit authority had to take trains from other
commuter and subway routes to open the new line and it left
hundreds of thousands of commuters stranded Monday morning.
In another obvious pre-election move, Chavez also decreed
that the new line would be free until December 30.


12. (C) Rosales is being advised by some well-known
Venezuelan economists and their views are evident in his
campaign platform. At a recent meeting with econoffs, one of
the main advisors to the Rosales campaign admitted that the
campaign was not making headway with the "chavista lite" and
"ni ni" (neither Chavez nor Rosales) voter groups that it
needed in order to win the election. He observed that their
own polling showed at least a 15 point deficit with Chavez,
and that it would be increasingly difficult to close that gap
in the month that remains. While it is doubtful that, if
elected, Rosales could keep all of his campaign pledges, they
represent a sound macroeconomic plan to wean the country off
of reliance on handouts and towards a policy that promotes
sustainable economic growth and real job creation without the
sole stimulus of historically high oil prices.
WHITAKER