CHAVEZ' ECONOMIC DECREES STRENGTHEN EXECUTIVE

C O N F I D E N T I A L CARACAS 001127 SIPDIS SECSTATE PASS AGRICULTURE ELECTRONICALLY HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MEWENS NSC FOR JSHRIER COMMERCE FOR 4431/MAC/WH/MCAMERON E.O. 12958: DECL: 08/11/2018 TAGS: ECON EFIN EAGR ELAB PGOV VE SUBJECT: CHAVEZ' ECONOMIC DECREES STRENGTHEN EXECUTIVE CONTROL REF: A. CARACAS 1090 ¶B. 2007 CARACAS 2396 ¶C. CARACAS 1114 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) a nd (d). ¶1. (C) Summary: The laws decreed by President Chavez July 31 further consolidate executive control over the economy. In the specific area of food supply and the more general area of consumer protection, they give the Executive broad command and control powers and greater expropriation authorities. They appear to codify President Chavez' vision of socialism by including community councils in decision-making processes; defining, however vaguely, new types of productive units; and promoting barter as a means of exchange. While the laws decree important pieces of Chavez' proposed constitutional reforms in terms of reduced property and economic rights, they do not touch on the autonomy of the Central Bank nor offer to workers the carrots of a six-hour day or a social security fund for informal workers as the proposed reforms did. The laws have provoked an uproar in Venezuela because of way they were decreed and, more importantly, because they establish by decree some of the proposals defeated in the constitutional reform referendum. The POLITICAL impact of these laws is likely to be as significant as the economic impact, as in many cases the laws simply codify what the BRV is already doing. End summary. -------------- The Thirteenth Hour -------------- ¶2. (SBU) As noted in ref A, President Chavez decreed 26 laws as the "Ley Habilitante", or enabling law, expired. The titles of the laws were printed in the July 31 edition of the Official Gazette (available August 1),but the actual text of the laws was not available until August 4 and 5, when limited numbers of "extraordinary" Gazette editions backdated to July 31 hit the streets. These laws have raised an uproar over the timing of their publication, the lack of consultation, and, most importantly, opposition claims that the laws implement many pieces of Chavez' proposed constitutional reform, which was defeated in the December 2, 2007 constitutional referendum. Twenty-two of the 26 laws are related to the economy, broadly speaking; this cable 
discusses the nature and significance of these 22 laws and their relationship to the proposed constitutional reform. (Note: The other four laws (to be covered septels) deal with public administration, the armed forces, the Solicitor General's Office, and administrative procedures. End note.) -------------- -------------- Food and Consumer Protection: The Executive Knows Best -------------- -------------- ¶3. (SBU) The two laws most striking in terms of increasing the Executive's de jure power are the Law of Agro-Food Security and Sovereignty (to be discussed in greater detail septel) and the Law for the Defense of People Accessing Goods and Services (consumer protection). Both laws state "community interests supersede individual interests" and permit the Executive to take over more easily goods or property where necessary in the interest of the larger community - as defined by the Executive. The consumer protection law eliminates the need for a previous declaration of public utility by the National Assembly before the Executive can start expropriation procedures. This law renames the BRV's consumer protection institute and grants it even wider powers, including broader punitive powers and the right to inspect any documents deemed relevant. The food security law charges the Executive with establishing a strategic food reserve under the custody of the military, allows the Executive to establish regional consumption levels for a given product, and gives the Executive the right to take a wide range of measures throughout the food supply chain. -------------- Other Areas of Greater Executive Control -------------- ¶4. (SBU) Several other laws also increase the Executive's power, though not to the same extent as the two laws discussed above. One law creates a "social fund" controlled by the Executive and financed from the profit and dividends from state-controlled companies outside of the hydrocarbon sector (i.e., not including PDVSA). A slight modification to the banking law allows the Executive to direct FOGADE, the BRV's banking insurance fund, to transfer assets to the Executive without public announcement or auction, to be compensated by the Executive at an appraised price. Several laws place previously "autonomous" institutes under the direct control of the relevant ministry; for example, the Law of National Rail Transport changes the Autonomous Institute of State Railroads to the Institute of State Railroads, which is under the Ministry of Infrastructure. The rail transport law also makes it easier for the Executive to expropriate property for rail development purposes. Finally, the Organic Law of Tourism gives the Executive, through the Ministry of Tourism, direct control of tourism promotion funds that were formerly divided among state tourism chambers. -------------- -------------- Prosumers, Communal Currency, Agrarian Assemblies -------------- -------------- ¶5. (SBU) As a body, the laws appear to advance Chavez' vision of popular participation by granting community councils at least a consultative role in many decision-making, implementation, and monitoring processes, including in areas related to housing, railroads, food security, agriculture and agricultural financing, and aquatic spaces. In most cases the exact mechanism for the councils' participation is unclear, however. In the case of agriculture, agrarian assemblies, a new type of community-based organization vaguely defined as "spaces for social harmonizing and planning of production," are given broad oversight powers. ¶6. (SBU) While many of the laws invoke the 2007-2013 Economic and Social Development Plan for the Nation (ref B), it is the Law for the Fomenting and Development of the Popular Economy that most directly creates an apparent legal framework for the "Productive Socialist Model" discussed in the plan. This law defines (vaguely) eight "socioproductive units"; promotes the economic model of barter by "prosumers" (producers and consumers in alternative economic arrangements); and encourages the development of "communal money" to be regulated by the Central Bank. While the law does not explicitly define new types of property (as the failed constitutional reform package did),in the definition of several of the eight socioproductive units it implies the existence of communal property. -------------- The Banks Got Off Easy - Por Ahora? -------------- ¶7. (SBU) The only change in the new banking law was the provision related to FOGADE assets (see paragraph 4). Many financial sector contacts had expected even more sweeping changes, based in part on the length of time the new law has been under development and on various drafts that were circulating. Several other laws do impact the banking sector, though not in the sweeping way the banking law might have. The Executive could use the Law of Credit to the Agricultural Sector, for example, to tighten the conditions associated with directed lending to this sector by fixing preferential interest rates and requiring banks to channel a fixed percentage of the agricultural portfolio to handicapped, old, or young individuals. More sweeping changes may be in the offing, however. According to press reports, changes to the banking law and the Central Bank law will be submitted to the National Assembly later in 2008. -------------- --- Houses, Housekeeping, and Other Positive Aspects -------------- --- ¶8. (SBU) Some of the laws actually improve Venezuela's legal framework and, if implemented well, could improve its institutional and economic framework. The Law on Aquatic Spaces, for example, replaces and updates a series of different laws that went back as far as 1979. The Law of Integrated Agricultural Safety (septel),while not without its problems, replaces an obsolete law and a confusing body of resolutions and addresses new and important issues such as the precautionary principle and biotechnology. Venezuelans could directly benefit from certain provisions in other laws, such as one raising the percentage of a home purchase that can be financed by a mortgage from 70 to 100 percent. -------------- -------------- Legislating Significant Parts of the Constitutional Reform -------------- -------------- ¶9. (SBU) The new laws codify key economic aspects of the proposed 2007 constitutional reform in two areas: property/economic rights and social production structures. Like the proposed reform, the food security law grants the Executive the right to expropriate and take whatever other steps might be necessary to secure the food supply, and the consumer protection law extends this power beyond the food chain to basically any other type of goods and services. While not defined as explicitly as in the proposed reform, different types of property are implicitly observed in the popular economy law, and the reform's call for new forms of production to "create the best conditions...for a socialist economy" is given a legal structure, even if vague. Other key economic aspects of the proposed reform are not addressed in these laws, including reduced working hours, a social security fund for informal workers, and the elimination of the Central Bank's de jure autonomy. (Comment: It is interesting to speculate why Chavez chose to leave these aspects out: in the case of the reduced workday and the social security fund for informal workers, one wonders if Chavez wanted to keep these carrots in reserve to include in another try at amending the constitution to allow indefinite re-election. End comment.) -------------- Attacks, Defense, and Continued Analysis -------------- ¶10. (SBU) As noted above, opposition groups are attacking the 26 laws as a package for legislating changes rejected in the constitutional reform referendum and for centralizing control in the hands of the Executive. Chavez and his allies have defended the laws and the process by which they were enacted, though not always in a consistent manner. In a context paper discussing the 26 laws, the Venezuelan Embassy in Washington emphasized that the food security law was "not meant to suppress the free market"; the Minister of Agriculture, however, said on August 6 "food products cannot be subject to the free market." While this law has attracted criticism from industry association Cavidea and concern from one major food products company, a representative of a second major food products company downplayed its significance to Emboffs, noting that the government was already heavily intervening in the sector. Other business associations are still studying the laws related to their sectors; as of August 8, lawyers for tourism and construction chambers were still studying the relevant laws to determine their impact, according to contacts at those chambers. -------------- Comment -------------- ¶11. (C) The opposition is right to interpret these 22 economic laws as an attempt by Chavez to implement by decree some aspects of the defeated constitutional reform package. Nevertheless, despite the sweeping economic provisions contained in some of these laws, they are probably more significant politically than economically. Many provisions now given the force of law were already being implemented de facto. Chavez had already started to exert Executive control and threaten property rights in the area of food supply, for example. He already controls a number of discretionary funds and has tried (not very successfully) to develop alternative production models. The barriers to advancing his vision further are not the lack of a legal framework, but rather political resistance to his vision and, secondarily, the severe economic consequences that would result from an even more rapid expansion of Executive control over the economy. These barriers still exist. Ironically, Chavez' decrees may further stiffen the POLITICAL resistance to the implementation of his vision (ref C). DUDDY