Francisco Rodríguez is an assistant professor of economics and Latin American studies at Wesleyan University in Middletown, Connecticut. From 2000 to 2004 he was the chief economist for the Venezuelan National Assembly. He corresponded with ET’s managing editor, Robert Bryce, by e-mail shortly after Venezuela’s president, Hugo Chávez, was re-elected on December 3.

ET: What does Hugo Chávez’s re-election mean for Venezuela? More broadly, what does it mean for Venezuelan-U.S. relations?

FR: In Venezuela, the government will take it as a mandate to implement more radical changes. These changes will probably include a constitutional reform and increasing state participation in price-setting and resource allocation. The fact that the opposition was not able to increase its vote share from the recall referendum means that there is a high probability that it will splinter with several groups vying for control.

I do not expect relations with the U.S. to improve. Venezuela is likely to keep on actively attempting to influence the political process in other Latin American nations, thus generating continual sources of conflict with any U.S. administration.

ET: The U.S. in general, and George W. Bush in particular, have been targeted for ridicule by Chávez. How important is Chávez’s rhetoric and should the U.S. be worried by it?

FR: Chávez’s rhetoric is important because the Venezuelan government takes it seriously as a source of policy direction and, more importantly, because Chávez himself takes it seriously. The rhetoric does not exist because U.S.-bashing is popular in Venezuela; in fact, Chávez had to significantly tone it down during the campaign. Instead, it exists because the radical core at the center of the government sees itself as taking part in a struggle against imperialism. Thus, it should be taken very seriously.

ET: How much of Chávez’s power comes from high oil prices?

FR: Chávez is extremely vulnerable to a decline in oil prices. The government is currently running a deficit (estimated at close to 2.3 percent of GDP, or about $3.4 billion per year). A decline is likely to create havoc with public finances. Furthermore, the government has already eaten away most of its space for expansionary fiscal and monetary policy. The current expansion is already generating considerable price pressure. Thus it has relatively little room to counteract the decline-trough expansionary policy without generating a rapid increase in inflation.

Chávez’s electoral success is based, more than anything, on the capacity to sustain high economic growth, rather than his social policies – which most studies show to have been relatively ineffective, except as a cash distribution system. When economic growth falters, so will his political base of support.

ET: Chávez talks a great deal about increasing oil trade with China. Do you expect that to happen?

FR: Yes. I believe the government is willing to pay a substantial economic cost in order to reduce its economic dependence on the U.S.

ET: PDVSA has become ever more closely intertwined with Chávez’s power. Are anti-Chávistas allowed to work within PDVSA?

ET: What about technology and PDVSA? We are hearing that the company’s best engineers and technologists have either quit or been fired. Will the company be able to recover from the ongoing “brain drain,” and if so, how?

FR: Although I do not have specific information on the breakdown of those fired, the fact that there have been substantial firings and that opposition to Chávez is strongest in the middle and upper class, who are also more likely to be highly educated, makes it very likely that PDVSA has suffered a deterioration of its human capital that should produce substantial losses in its long-term efficiency.

ET: In June 2006, the U.S. Government Accountability Office released a study on Venezuelan oil production and went on to speculate about what would happen if Chávez cut off the flow of oil to the U.S. Wouldn’t that hurt Citgo – and therefore, Venezuela – more than it would hurt the U.S.?

FR: The cutoff of oil supplies is only likely to happen in a state of confrontation with the U.S. that the government considers close enough to a war. That scenario is for now improbable.

ET: There’s plenty of discussion about the lack of transparency in the Chávez regime, particularly with regard to oil revenues and how they are spent. How do you see this issue? Is data available on oil money expenditures?

ET: Chávez talks a great deal about how he’s trying to help Venezuela’s poor. But there have been a number of recent news stories focusing on the increasing fortunes of Venezuela’s elite, and the fact that Chávez’s administration is actually making the country’s wealthy even richer. Is this true? And if so, why is it happening?

FR: There is very little evidence that Chávez’s social policies have had a significant effect on the well-being of the poor. The decline in the poverty rate is similar to that experienced by Venezuela in previous economic expansions. The economy is growing (fueled by the five-fold expansion in oil prices), but the poor are not getting a higher share of that growth. Some social indicators are actually deteriorating: the percentage of newborns who are under-weight or under-height actually increased from 8.4 to 8.8 percent between 1999 and 2004. In a recent study carried out by Daniel Ortega of the Instituto de Estudios Superiores de Administración in Venezuela, Edward Miguel (U.C.-Berkeley), and myself, we found that there was no evidence in the data to support the government’s claim of having eradicated illiteracy; indeed, the absolute number of illiterate Venezuelans stands at more than a million persons, just about the same as it was before the government’s highly touted literacy program started.

ET: What’s the status of foreign investment in Venezuela? Is it increasing or decreasing?

FR: The most recent Central Bank figures show that the stock of FDI has decreased by $778 million in the first three quarters of 2006. This implies that foreign companies are not investing enough to cover depreciation or are selling their existing stocks. This is probably a result of the combination of weak property rights and an appreciated exchange rate. The 2006 decline marks the first time since 1997 that FDI has decreased.

ET: You’ve written a lot about the history of oil production in Venezuela. In 1975, Juan Pablo Pérez Alfonso, a founder of OPEC, called oil “the devil’s excrement.” In 1998, Chávez said, “Oil is a geopolitical weapon and these imbeciles who govern us don’t realize the power they have.” Who was right – Pérez or Chávez? And how do you account for their radically different views on Venezuela’s most important commodity?

FR: Oil can be a very positive tool for development, when it is used properly. What is essential is to try to use the resources from oil revenues to strengthen the non-oil industry, so that the economy will be ready to respond when downswings in oil prices occur. This was achieved by formerly oil-dependent nations like Indonesia and Mexico, whose growth of the non-oil industry has been so rapid that they are no longer seen primarily as oil producers. It has not been done in Venezuela in the past, nor is it being done in the present. Venezuela’s dependence on oil has increased during the Chávez administration.