venezueia IndustrialSector Report
March15, 1991 Brazil,Peru and Venezuela Energy and Induistry Division CountryDepartment I LatinAmerica and the CaribbeanRegion
Public Disclosure Authorized FOR OFFICIALUSE ONLY
o ~~~ ~ ~ o' ~ ~ ~ ~ ~ ~ ~.. ~ ~ ~ ~~~ 3 '3
u~~~~~~~~~~~~~~~~~~~~~~ > j ) 5 <' O
\~~~~~ - -
. ~~ ~ ~ ~ ~ ~ ~ . .3 . . 3 Public Disclosure Authorized
t ' ' ' ' ' 7 ' ' ' ' t '' -V. ' ;" '0'3'"
CU'' ' ' ''*
D ~ ~ ~ '3 .- - y 0 ~ ~ ~ ~ ~ ~ t
,_ ~ ~~~~~~~O Public Disclosure Authorized '3 '3 . U
3\ 3 _
*~~~~~~~~~~~~~~~~~~~ '3
Documentof theYWrld Bank << .~~~~~~~~~~~- ". ,
_ ' , 4 o~~~~~~~~~~~~~~~~~1 ' . 3
Thisdocumnent has a restriicteddistribution anci may be used by recipients . , onlyhn theperfomrnance oftheir official duties. Its contents 'may not oterwise be disclosedwithout World Bank authorization.. ^ - ' : Public Disclosure Authorized CURRENCY EOUIVALENTS
Currency Unit = Bolivar (Bs) US$1 = 48.75 Bs (As of September26, 1990)
ACRONYMS
LCASA - Aluminiodel Caroni, S.A. (State-ownedaluminum company) HV - Banco Central de Venezuela (Centralbank) ADAFE - Compaiifa An6nima de Administraci6ny Fomento El6ctrico (State-ownedelectric company) NTV - CompafifaAn6nima Venezolana de Tel6fonos(State-owned telephone company) AVN - CompafiMaAn6nima Venezolana de Navegaci6n(State-owned shipping line) DRPOINDUSTRIA - Small and MediumIndustry DevelopmentCorporation K]D - Completely-knocked-downassembly unit NC - Central North Coastal Region R - ConcentrationRatio VG - Corporaci6nVenezolana de Guayana Fl - Direct Foreign Investment PZ - Export ProcessingZone [NEXPO - Export FinancingFund IV - Fondo de Inversionesde Venezuela(Venezuelan Investment Fund) DNCAFE - Fondo de Caf6 (Coffeebuying and exportingboard) 3)NCREI - Fondo de Credito Industrial(Government industrial development fund) DNTUR - Fondo de Turismo (Governmenttourism developmentfund) DP - Gross DomesticProduct 4CE - InstitutoNacional de Cooperaci6nEducativa (Governmenttraining institute) iP - Instituto Nacionalde Puertos (Governmentports institute) [BOR - London Inter-BankOffer Rate IC - Newly IndustrializedCountry TB - Non-tariff Barrier CEI - Oficina Central dieEstadfstica e Informatica(Statistical agency) EQUIVEN - Petroqufmicade Venezuela(State-owned chemical producer) DVSA - Petr6leos de Venezuela,S.A. (State petroleumproducer) VP - Precio de Venta al Pdblico (Maximumretail price) ECADI - Oficinadel iogimen de CambiosDiferenciales (Office of the differentialexchange rate) IPI - Registro de Informaci6nde Proyectos Industriales(Industrial investment registry) [DOR - Siderurgicadel Orinoco(State-owned steel company) [EX - Superintendenciade InversionesExtranjeras (Superintendent of foreign investment) [VENSA - Sidertrgica Venezolana,S.A. (Private steel company) DE's - State-OwnedEnterprises ENALUM - IndustriasVenezolanas de Aluminio(State-owned aluminum company) IASA - VenezolanaInternacional de Aviaci6n(State-owned international airline) FOROMCIAL USE ONLY
TABLE OF CONTENTS
LIST OF TABLES ...... - iv-
LIST OF FIGURES ...... - vi-
EXECUTIVE SUMMARY.... vii
1. INTRODUCTION ...... [11
2. INDUSTRIALPOLICY: THE 1980'S AND THE REFORM ...... 7]
2.1 Trade Policy ...... [-.-.-.*...... 81
2.1.1 Import Restrictions ...... [ 81
2.1.1.1 Foreign Exchange Controls [ 81 2.1.1.2 Non-tariff Barriers [141 2.1.1.3 Tariffs [191 2.1.1.4 Import Restrictions: Combined Effects [ 201 2.1.1.5 Reform of the Import Regime [ 25 ]
2.1.2 Export Incentives ...... [25 ]
2.2 Public Enterprises ...... [27]
2.2.1 Distribution of Ownership ...... [30] 2.2.2 Policy Instruments .[...... 301 2.2.3 Domestic Market Practices ...... [...... 32] 2.2.4 Impact on the Industrial Private Sector ...... [33] 2.2.5 Recent Policy Changes ...... [ 34 1 2.2.6 Recommendations ...... [ 35 1
2.3 Other Instruments of Industrial Policy ...... [36]
2.3.1 Price Controls . 361 2.3.2 Financial Incentives ...... *.l 37 1 2.3.3 Tax Policy .[ 38] 2.3.4 Production Subsidies .[ 39]
3. POLICIES AND PERFORMANCEIN THE MANUFACTURINGSECTOR ..... 41
3.1 Overviewof the ManufacturingSector: Structure.Behavior. Performance .. 41
3.1.1 Structure of the ManufacturingSector ...... 41
3.1.1.1 Share of Manufacturingin GDP 41
This document has a restricted distributionand may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwise be disclosedwithout WorldBank authorization. - ii - 3.1.1.2 Compositionof Output 143 3.1.1.3 Size and Location of ManufacturingPlants [ 441 3.1.1.4 Concentrationof Production 1 47 1
3.1.2 Market Structure and Behavior ...... [53 1
3.1.2.1 Concentrationand Price-Cost Margir,s [ 54 1 3.1.2.2 Price-Cost Margins, Concentration, Import Competition and Export Orientation [55 1
3.1.3 Performance ...... [57 1
3.1.3.1 Growth in ManufacturingValue-Added [57 1 3.1.3.2 Labor Productivity [59 1 3.1.3.3 Productivityof Investment [61] 3.1.3.4 Compositionof Exports and Export Performance l61 ] 3.1.3.5 Capacity Utilization [66 1
3.1.4 Ass,jssment ...... [67 1
3.2 Labor in the Manufacturing Sector: Policies and Evidence ...... [ 67 J
3.3 Foreign Investme,i .in the Manufacturing Sectr .[ 73 ]
3.3.1 Regulationof Direct Foreign Investment ...... [74 j 3.3.2 SectoralPattern of Foreign Investment ...... [75 J 3.3.3 Characteristicsof Foreign and Domestic Firms ...... [76]
4. AGENDAFOR THE 1990'S . . . 791
4.1 Trade Reform: Next Steps ...... [80]
4.1.1 Exchange R ...... [81[...... 4.1.2 Uniform Treatmentof Sectors ...... 81 4.1.3 Licenses ...... [82] 4.1.4 Tariffs ...... 82] 4.1.5 Exemptions ...... [83 ] 4.1.6 Exports and Export Subsidies ...... 83] 4.1.7 Export Processing Zones ...... 84 1 4.1.8 Export Credit and Export Credit Insurance ...... [85 4.1.9 Public Services ...... [851
4.2 Role of the Development Ministry ...... 86 1
4.2.1 InvestmentClimate ...... [86 1
4.2.1.1 InvestmentPromotion [87 1 - iii- 4.2.2 promotion of CompetitiQn...... 1891
4.2.2.1 Antitrust Legislation [901
4.2.3 InfQmatigiad Research ...... 1941
APPENDIX1 ...... ( 95 1
BIBLIOGRAPHY...... 1011 - iv -
LIST OF TABLES
Table 1.1: Structureof Productionand DomesticAbsorption, 1971-88...... 21 Table 1.2: Structureof Production--InternationalComparisons, 1965-87 ...... 3 1 Table 1.3: Per Capita ManufacturedExports' 1980, 1987 ...... [5 Table 1.4: InternationalComparisons of Productivity ...... [6]
Table 2.1: Foreign ExchangeSales and ExchangeRates, 1984-87 ...... 9 Table 2.2: Importsby Type ar. ' ExchangeRates, 1981-88 ...... [10] Table 2.3: Percentageof 1986 Importsat Free Market Rate ...... 12 ] Table 2.4: Benefits to MerchandiseImporters from the Preferential ExchangeRate, 1984- 87 .[. 14] Table 2.5A: Import Restrictions and Average Tariffs by Sector and Stage of Processing, 1989 ...... [16] Table 2.5B: Import Restrictions and Averaga Tariffs by Sector and Stage of Processing, 1990 ...... [16] Table 2.6A: Import Restrictionsand AverageTariffs by ManufacturingSubsector, 1989 ...... 17 1 Table 2.6B: Import Restrictionsand AverageTariffs by ManufacturingSubsector, 1990 ...... [17 ] Table 2.7A: ProductionCoverage of NTB's by ManufacturingSubsector, 1989 ...... 18 ] Table 2.7B: ProductionCoverage of NTB's by ManufacturingSubsector, 1990 ...... [18 ] Table 2.9: ManufacturingValue Added by State and Private Firms ...... [ 311
Table 3.1: Manufacturingas a Percentageof GDP, 1968 and 1987 ...... [42] Table 3.2: Share of ManufacturingOutput by End Use ...... [43] Table 3.3: Share of ManufacturingValue-added by Subsector, 1985 ...... [441 Table 3.4: Distributionof Plants by Size, 1975-1988 ...... [45] Table 3.5: Comparisonof Plant Sizes, 1984 ...... [45] Table 3.6: Distributionof ManufacturingPlants by State, 1975-88...... - 46 l Table 3.7: Concentrationof Production,1975 and 1988 ...... [48] Table 3.8: IndustrialConcentration by Four-DigitCIIU, 1975-88 ...... [49] Table 3.9: Concentrationof Production: InternationalComparisons ...... t] Table 3.10: Distributionof Plants by Age, 1975-1988 ...... [53 Table 3.11: Price-CostMargins by Degree of Concentration...... 54] Table 3.12: CorrelationCoefficients for SelectedVariables ...... [-.56] Table 3.13: Growth Rates of ManufacturingValue-Added by Subsector, 1975-88...... [ 57] Table 3.14: Labor ProductivityGrowth, 1975-1988 ...... [ 59] Table 3.15: Gross Investmentas a Percentageof Value-Added,1976-88 ...... [ 60] Table 3.16: Compositionof ManufacturedExports, 1981-88 ...... [61] Table 3.17: Types of ManufacturedExports, 1981-1988 ...... [63 ] Table 3.18: Value of Exports, 1975-87 ...... [ 641 Table 3.19: Export Orientationby Subsector ...... [ 65] Table 3.20: CapacityUtilization, 1984-88...... -.- ... [ 66] Table 3.21: Factors AffectingCapacity Utilization, 1984-88 ...... [66] Table 3.22: Wage and Non-wageBenefits, 1989 ...... [ 68] Table 3.23A: Share of Non-WageCosts in Total Labor Costs ...... [70] Table 3.23B: Comparisonof Non-WageCosts/Salaries by Plant Size ...... [70] Table 3.24: Indices of Real Wage and Non-WagePayments, 1985-1988 ...... [71] Table 3.25: Non-wage Costs: InternationalComparisons ...... [ 72] Table 3.26: Total Earningsas a Percentageof Value-Added: InternationalComparisons ...... [ 72] - v -
Table 3.27: Changes in Regulationof Foreign Investmentunder Decree 727 ...... [74 l Table 3.28: SectoralPatterns of Foreign Ownership, 1976-88 ...... 76 ] Table 3.29: Behaviorof Plants with 5% or More Foreign Participationand Plants with 100% DomesticParticipation, 1976-88 ...... [77] Table 3.30: SectoralComparison of Foreign and DomesticFirms in 1988 ...... [78 ]
Table A.2. 1: Distributionof Sales (ExcludingPetroleum) by State, 1975-88...... 95 ] Table A.2.2: Price-Cost Margins By Sector ...... [ 96 ] Table A.2.3: IntemationalComparison of Price-Cost Margir.s, ' 985 ...... [ 97 ] Table A.2.4: Growth of ManufacturingValue-Added ...... [ 98 ] Table A.2.5: InternationalComparisons of Export Orientation, 1985 ...... [ 99 l Table A.2.6: Employmentby ManufacturingSubsector, 1975-1988 ...... [100 ] - vi
I,s OF FIGURES
Box 1: ArbitrageGains betwe,enVenezuelan and U. S. FinancialMarkets at Parallel ExchangeRates, 1984- 89 ~ ...... [ 4]
Figure 2.1: Price and Output Under Officialand Free Market ExchangeRates ...... 1 20 1 Figure 2.2: Price and Outputwith Import Quotas...... [ 22 ] Figure 2.3: Price and Output with Import QuotasOn Outputsand Inputs...... [ 23 1
Box 2: A Boom in NontraditionalExports? . 28 1
Figure 3.1: Share of Manufacturingin GDP, 1987;International Comparisons. [42 1 Figure 3.2: Real Investmentin Manufacturing,1976-88. [ 58 l Figure 3.3: Non-TraditionalExports and the Real EffectiveExchange Rate. [ 62 1
This' reprtisaed onwrk by :A-nnk: .Irisn.ol... d.cnslat,Lntrt1et Lr~ h ...(o.nsult. , M ...... i p,.ng.n . . . p .
h1gh-qualityu instein EXECUTIVE SUMMARY
1. Introduction
1. Between 1974 and 1982 Venezuelaenjoyed windfall oil revenues equal to about two years' GOP and supplementedthese resourceswith foreign borrowing. The Governmentsought to diversify the industrialbase, reserving for itself the "strategic sectors" or "basic industries"--principallyaluminum, steel, and energy. Private investors were encouragedto develop activities which would substitutefor imports and which were'downstream from the basic industries. Import substitutionwas encouragedby protection through tariffs and licenses, by directed credit, and by investmentcontrols.
2. When oil prices dropped in the 1980s, the bolfvar became overvalued, but it could not be maintained. In 1983 the bolfvar was devalued and a multiple exchange rate system was introduced. Exchangecontrols, which were changedfrequently, ad.-d more discretionaryincentives. Price controls were applied throughout the economy. Many private exports were prohibited, and the anti-exportbias discouragedmost others.
3. The result was an uncoordinated, inefficient system characterized by contradiction, redundancy, and discretion. Through most of the 1980s, the government controlled every aspect of a firm's decisions: input prices and quantities, output prices, investments,employment conditionsand market access. Venezuelansfound the most profitableinvestment opportunities were outside the country. The petroleum windfalls had favored Venezuela, but the Government's economic policies encouraged higher consumptionand lower private investment,productivity, and GDP. 2. Ind4ustrialPolicy: the 1980s and the Reform
4. Industrial policy in the 1980s concentratedpower in government ministries and supplanted market-basedtests of efficiency. Policy may have been based on benevolent intentionsof maintaining wages and aiding poorer consumers,but the result was unnecessarycosts and inefficiencieswhich were passed on to labor in unemploymentand to consumersin higher prices, lower quality, poorer service, and a reduced range of products.
2.1 Trade Policy
5. The most potent instrumentsof industrialpolicy during the 1980s were administeredthrough trade policy: exchange allocations, import licenses and delegations, tariff exonerations, and export incentives. Even with large export subsidies,the importcontrols createda regime in which the industrial sector had little incentiveto compete in internationalmarkets.
6. 2.1. 1 Import Restrictions. To import most items into Venezuela, it was necessary to obtain an import permit from the Developmentor the Agricultural Ministry which would be granted only if domestic producers did not object. Licenses protected an estimated 50 percent of the manufacturing sector. Tariffs were prohibitive, but exonerations were commonly given if there was no domestic production. Tariff exonerationswere worth about three percent of GDP annually.
7. Importers applied for foreign exchangeat the official rate. Ten percent of imports entered at the free market rate, which averaged 110 percent above the official rate. This large differentialwas a heavy barrier to imports which made the right to exchange at the official rate a valuable benefit. - viii - Benefits .o merchandiseimporters--awarded with little control or accountability--wereequal to between five and 20 percent of GDP annually.
8. The combinedimpacts of these programs were large, but it is impossibleto determine from theory how the benefits were dividedamong importers, workers, producers, and consumers. It has been completely reformed with the goal of applyinglicenses and prohibitionsto protect no more than five percent of domestic p ouction, placing all tariffs in the range of ten to twenty percent by 1993, and maintaininga unified, floating exchangerate.
9. 2.1.2 Export Incentives. Exporters were required to surrender their foreign exchangeat the official rate but were offered three principalincentives: a currency retention scheme; an export subsidy; and preferentialcredit. The incentivesfavored low value-addedexports. They were changed fre(iuently and without much prior notice so that exporters were reluctant to plan on them. Currency retention, at its peak in 1966, paid an estimated 2.8 percent of GDP for exJEortswhich were about two percent of GDP. The export subsidy averaged .3 percent of GDP (and 18 percent of the fob price of the exports which received it) and the value of export credit was probably less that .01 percent of GDP.
10. Currency retention was eliminatedin 1987and under the reform program the export subsidy was fixed at 30 percent of fob price for one year and reduced in stages to 15 percent and five percent. The high export subsidy, coupled with the free market exchangerate and the domesticrecession led to an increase of nontraditionale:xports from $1.87 billion in 1988 to $2.79 billion in 1989. However, by looking at changes in unit values of expoits, it is estimated that half the apparent increase can be ac.ounted for by the change from a regime whichrewarded und-r-invoicing to one which rewarded over- invo:cing: Either 1988exports were higher than reported or 1989exports were lower, or both.
2.2 Public Enterprises
i1. State-owned enterprises (SOEs) produced 26 percen' of GDP in 1988. While petroleum accountedfor most productionSOE also producednine percent of goods and 18percent of services. The SOEs are concentrated in resource-based, export-oriented activities and in services. Their business practices vis-a-visthe private sector have reflected their monopolisticpositions and resulted in transfers from private to public firms and in high-cost, unreliablegoods and services. The Government's reform program--especiallyrestructuring and privatizationof major SOEs and trade and price liberalization--is likelyto improve qualityand services, but additionalmeasures could be taken to increaseSOEs' exposure to market forces.
2.3 Other Instruments of Industrial Policy
12. 2.3.1 Price Controls. In theory, every price was subject to Governmentcontrols, but the DevelopmentMinistry regulatedcarefully the prices of 43 "basic necessities"and another 86 "priority" goods and services. The price controls caused occasional serious shortages and encouraged illegal exports. Under the reform program, controls were eliminatedon all but 17 items.
13. 2.3.2 FinancialIncentives. The Governmentchannelled credit on favorableterms through specializedinstitutions. The total value of the subsidiesto industry was relatively small, and directed credit is being reduced under the financial sector reform program. - ix -
14. 2.3.3 Tax Policy. Corporate tax rates are telativelyhigh, but there are extensiveexemptions which reduce the tax base, encourage evasion, distort resource allocation and, because they are so widespread, lose much of their force. The tax system is being reformed in consultationwith the IMF.
15. 2.3.4 ProductionSubsidies. Direct subsidieswere used for food productionand distribution: fertilizers, animal feed, powdered milk, corn meal, and coffee. The subsidies were not large as a percentageof GDP, but were large relative to the industriesthey affected. Subsidieshave been retained only for fertilizer and powdered milk. 3. Policiesand Performancein the ManufacturingSector
16. Manufacturingoutput grew at an average rate of 3.9 percent between 1975and 1988due to large public investments,import protection, and targeted incentives. The cost of the industrialpolicies of the 1970s and 1980s is reflected in reduced productivity, low capacity utilization, and the failure of Venezuelanfirms to compete effectivelyin internationalmarkets.
3.1 Overview of the Manufacturing Sector: Structure, Behavior, Performance
17. 3.1. I Structureof the ManufacturingSector. The share of industry in GDP was 38 percent in 1987, while the share of manufacturingwas 20 percent. Although manufacturing increased from 12 percent of GDP in 1968, it is lower than in other countries at comparablestages of development.
18. In comparisonwith NIC's or Latin Americancountries as a group, Venezuelanmanufacturing is specializedin basic industries. The share of value-addedin basic industries is higher while the share in textiles and capital goods is lower. Half of manufacturingis chemicals, petro-chemicals,steel and aluminum. This pattern reflects the government's policy of developing sectors in which it believes Venezuelahas a comparativeadvantage.
19. Location. Industrialdevelopment centered in the central-northern-coastal(CNC) region where the largest markets were located. Apart from proximityto markets and access to better communication and transportation, the CNC region benefitted from subsidizedinfrastructure and access to the central governmentwhich grants industrial in_entives. Location policies adopted in the .9- have not had a clear effect in moving productionout of the Caracas area. Althoughrestrictions on plant location led to some movement out of Caracas, most plants seem to have moved to the surrounding areas. A mnore efficient approach would be to set prices for utilities and housing services which reflect regional differentialsin costs and demand.
20. Plant Concentration. In 1975,58 percentof all sectorshad concentrationratios of 50 percent or greater. In 1988, 47 percent of consumer goods sectors had concentrationratios of 50 percent or greater and, for producer goods sectors,the comparablefigure was 59 percent. The greater concentration in producer goods--whichinclude heavy industry and capital goods--reflectsa number of factors. The technologyfor these sectors is more likely to be characterizedby increasingreturns to scale, leading to more concentratedproduction. However, a number of producer goods sectors were also rserved for publicfirms, reinforcingthe concentrationin those sectors. Althoughthe manufacturingsector has high concentration,production levels in some sectors are below efficient scales. In the automotiveindustry, there are 15 assemblersin a marketwhich fell from 163,000units in 1982to 26,000 units in 1989. Since x - production should be at least 100,000 units to exploit economies of scale, auto assemnblycannot be efficientby internationalstandards without exports.
21. Industrial policies have contributedto concentration. Restrict.onson entry into key sectors, investment licenses, and exchange allocations have benefitted incumbents and reduced competition. Concentrationdoes not necessarilyreduce economic welfare, particularlywhere it permits the exploitation of economiesof scale. Both in concentrateddomestic markets and the contrastingcase of fragmented production, pressure from imports can either provide competition or the necessary impetus towards consolidationof production. Complementarydomestic regulatory measures, however, may be necessary. Consolidationof production cannot occur without relativelyeasy exit and bankrupt%;ypolicies.
22. 3.1.2 Market Structure and Behavior. Concentrationaffected firms' pricing. There is a significant,positive relationbetween one measure of concentrationand price-cost margins during 1975- 88. Import competition,which could be the chief elementof market discipline in a small economy, does not seem to have affected firms' behavior. Investmentin manufacturiighas declined, as indicatedby the average age of plants. Finally, export share is positively correlated with both import penetration and concentration and is negatively correlated with protectiou.
23. The correlation between exports and concentrationsuggests that economiesof scale (as in steel) have been importantfor exportingfirms. Any future anti-trustprovisions which seek to maximize domestic competition must take into account the importance of economies of scale both for efficient output levels in the domestic market and for export expansion. One approach is to foster import competitionto control market power. A complementarysolution is to create an environment more conducive to export activity which would allow economies of scale and simultaneouslyincrease the number of firms. These solutions--mp!icitin the Government's trade reforms-are in fact one: a firm capable of competingdomestically against imports should also be capable of export rivalry abroad.
24. 3.1.3 Performance. The period 1975-88was characterizedby inefficientgrowth of output. Large investments, financed by oil revenues, were directed to steel, aluminum, and petrochemicals. Manufacturinggrowth, which averagedeight percent during the late 197Cs,fell below two percent in the mid-1980s. Inefficiencyis evidentin low growth of labor productivityor--in sectors dominatedby public enterprises--declinesin the rates of outputper worker. Other signs of inefficiencyinclude high ratios of investmentto value-addedin public enterprises,low rates of capacityutilization, and the manufacturing sector's inabilityto competeinternationally.
3.2 Labor in the ManufacturingSector: Policiesand Evidence
25. In the 1970sand 1980s,the governmentintroduced measures to increasewages and non-wage benefits. The evidencesuggests that, althoughnon-wage costs increased as a share of total labor costs to the employer, real wages fell between 1975 and 1988.
26. Changes in real earnings between 1975 and 1988 have differed between public and private plants. Real remunerationstayed almostconstant in sectors with-.a predominanceof private enterprises. In petroleum, steel, and aluminum,however, real remunerationdeclined by one percent annually. This suggests that real earnings outside of these sectors remained essentiallyconstant over 1975-88. Labor productivitydeclined by more than four percent annuallyin sectorsdominated by public enterprises, but increasedin other sectors. It appearsthat decliningreal wages in aluminum,petroleum, and steel reflect declining productivity,although the rate of productivitydecline exceeds the loss in real earnings. - xi - 27. Internationalcomparisons suggest that the share of labor costs in value-addedin Venezuela is relatively high. High labor costs, in combinationwith low rates of labor productivitygrowth, may be two factors which account for the drop in real earnings over 1975-88.
3.3 Foreign Investment in the Manufacturing Sector
28. Direct foreign investment(DFI) has been smallin the manufacturingsector. Restrictionswere imposed on sectors open to DFI, on profit repatriation, on re-investment, and on tax rates. These restrictions were reformed in February 1990. Only petroleum, media, professional services, public safety, and banks are reserved for nationalfirms and, except for petroleumproduction and iron ore, all sectors previouslyopened to mixed firms are open to foreign firms.
29. Very few plants have any foreignownership. In 1988, 94 percent of plants were domestically owned, three percent were "mixed," and two percent were "foreign." The pattern of limited foreign participationheld--although less strongly--amonglarge firms: For firms with more than 100 employees in 1988, 85 percent were 100 percent domesticallyowned. Foreign ownership is narrowly concentrated in a few large establishments and mixed enterprises. In 1988 three sectors (metal products and machinery, chemicals, and food processing)accounted for almost three-quartersof foreign ownership.
30. Labor productivity(output per employee)is greater in plants with foreign participation,and the differentialhas been widening. Anotherdistinguishing feature of firms with foreign participationis that their shares of imports as a percentageof intermediatesand of exportsas a percentof sales are higher than domestic firms'. The superior productivity and export performance of plants with foreign participationsuggests that recent reforms, which open the economyto greater foreign participation,may have beneficial effects on performance. 4. Agenda for the 1990s
31. The VenezuelanGovernment has abandonedthe instrumentsit used to control the industrial sector in the 1980s, and is eliminatingother discretionaryindustrial incentives. The economy is being openedto foreign investment;taxes are being reformed; and privatization,public enterpriserestructuring, and financial sector reform programs are being introduced. The thrust of these reforms is to reduce the Government's role in the economy and to give greater prominence to market-based incentives and decisions. For the industrialsector, the outstandingitems on the policy agenda are the continuationof the trade policy reforms and implementationof a domestic policy regime supportive of internal competition. The role of the DevelopmentMinistry in support of these reforms lies in promoting competition, fostering efficient investment, and providing and supporting information, research, and analysisto advancethe broad interests of the industrialsector in economicpolicy-making.
4.1 Trade Reform: Next Steps
32. The trade reform has replacedthe system of uncontrolled,ad hoc protection and costly export subsidieswith a system which--whenit is fully implementedin 1993--willuse effective exchange rate managementin place of directed programs aimed at importsubstitution or export promotion. Moderate tariffs-between ten percent and 20 percent--wouldoffer additional protection for domestic economic activities, and the Government's intention is to provide comparable levels of effectiveprotection to all sectorsto encourageefficient resource allocation. Licenses would provide further protectionto no more - xii - than five percent of domestic manufacturing. This protection through licenses and tariffs would leave a residual anti-export bias which would be accepted as a cost to the economy. Export subsidies would be eliminated.
33. 4.1. 1 ExchangeRate. The most important single element of the trade reform program has been unifying and floating the exchangerate. Exchange rate managementwill encourage an efficient allocationof resourcesbetween the traded goods sector (importablesand exportables)and the nontraded sector. In the future it will be necessary to manage the exchange rate to accommodateunexpected changes in petroleum prices. The Governmentis studying an oil stabilizationfund to absorb revenues when prices are high and to utilize them when prices are low. Exchange rate managementwill be necessaryto allow investors and producers to form reliable expectationsof future exchangerates.
34. 4.1.2 UniformTreatment of Sectors. One of the cornerstonesof the adjustmentprogram has been to re-orient the economybased on transparent,broadly applicablegeneral principlesrather than the previousarray of industry-specificrules and standards. With the notable exceptionof agriculture (which is currentlybeing addressed)the Governmenthas, to date, maintainedan admirabledegree of uniformity of treatment among sectors. Tnis is an important element of the program, both politically-to show impartiality,and economically--toallow market forces, rather than bureaucraticor politicaljudgements, to reveal the activitieswhich are most robust.
35. 4.1.3 Licenses. As the Governmentapproaches its medium-termgoal of reducing licenses and prohibitionsto protect no more than five percent of manufacturing,it will have to consider longer- term objectives. It should look at a longer-termgoal of eliminatingall licenses and prohibitions. With tariffs, internal prices move with world prices, separated only by the percentage of the tariff rate. To the extentthat the Governmentwishes to exemptsome sectors from the forces of the adjustmentprogram (expressedin Venezuelaby the five percent target for licenses and prohibitions),it would be preferable to grant them through fixed-term(one-to-three years) tariff protectionslightly (five-to-ten percent) above the ceiling for other sectors.
36. 4.1.4 Tariffs. The most importanttariff reductions are yet to come. At each step, a greater proportion of the domestic economy will be subject to foreign competition. Manufacturers which are unchallengedby imports with a 50 percent tariff will find greater competitionat 20 percent.
37. As the Governmentapproaches its medium-termtarget of a ten-to-twentypercent tariff range, it should consider its longer-termgoals. It may wish to examine a longer-term goal of a unified tariff at a rate between five and ten percent or lower. The ten-to-twentypercent range could leave high effectiveprotection for activitiesof low value-added. Further, it would mean that Venezuelanconsumers wouldbe paying prices 20 percentabove world levels for many items, and it would continueto encourage investment in low value-added, inwardly-orientedindustries. If Venezuelan industries are to be competitive in world markets, they must also be competitive at home, and the surest way of accomplishingthat would be to eliminatetariff protection so that investmentwould be directed to those activitieswhere Venezuelawould be most competitive.
38. 4.1.5 Exemptions. Discretionarytariff exonerationshave been eliminatedexcept for some assemblyoperations. There also are exemptions,established in law, for some entitiessuch as state-owned enterprises,universities, and the central government. The remainingdiscretionary exemptions should be eliminated,and legislationshould be introducedto abolish statutory exemptions. - xiii -
39. 4.1.6 Expors and Exort Subsidies. Over the years, the role of export subsidieshas been forgotten and the Governmenthad to fend off many spurious claims for exporters' right to the subsidy. The subsidy initiallycompensated exporters who, under the multipleexchange rate regime, were required to surrender their foreign exchangeto the Central Bank at the official rate. With the unification and floatingof the exchangerate, the subsidyno longer served that purpose, and the Governmentwas correct in reducing it and in its plans to eliminate it as soon as an effective duty and indirect tax rebate scheme is availableto exporters.
40. 4.1.7 Export ProcessingZones. There is interest within Venezuela in establishingexport processing zones (EPZ's). These zones are economicenclaves within which manufacturingfor export occurs under virtual free trade conditionsby exemptingexporters from some administrativeprocedures, customsduties, and perhaps other taxes and/or labor laws. These are not an effecdivesolution to long- term problemsof efficientresource allocation,and will be less attractivein Venezuelaas the trade reform lowers tariffs and other obstacles to internationaltrade. While the Governmentshould not discourage private developmentof EPZ's, it should avoid any programs which would subsidize them.
41. 4.1.8 Export Creditand EWportCredit Insurance. FINEXPOhas offered credit at subsidized rates to a limited number of exporters. There is no justificationfor these subsidiesand they encourage many distortions in the industrial incentives. Exporters should pay market rates for credit. The Government should encourage the development of private markets which could provide suitable instrumentsfor export credit and insurance.
42. Exporters have sought subsidies for an export credit insurance scheme which would allow them to export to risky clients in countries with poor credit records without bearing the political and/or commercial risk of default. The Government should not subsidize such programs without a careful analysis to establish that the benefits would exceed the costs and risks. The records of most official export credit insuranceagencies in other countries are poor. As long as there are no laws which prevent private insurers from offering export credit insurance in Venezuela,the fact that it is not offered or is "too costly" most likely indicates that the exports involved would be too risky and should not be undertaken.
43. 4.1.9 Public Services. It is widely argued that the private sector has adjusted to the trade reforms and that the public sector has not. Entrepreneurspoint to a long list of state-ownedenterprises and government services which are costly and inefficient: products of the basic industries, communications,electricity, water, shipping, ports, and customs administration. The Governmenthas begun a program of restructuringand privatizationwhich will address these concerns, but the program is a year-and-a-half behind the trade reforms. The correct policy response is not, as some have advocated, to offset these cost penalties with subsidies but, as the Government's restructuring and privatizationis designedto do, to eliminatethem at the source. It is incumbenton the Governmentto place its industrial sector in a more competitiveposition by eliminatinggovernment-imposed obstacles. The appropriate governmentalrole in promoting industrial competitivenessand exports lies in placing producers in the most advantageouscompetitive positions through efficientservices and infrastructure.
4.2 Role of the DevelopmentMinistry
44. The DevelopmentMinistry has been restructuredto adopt a role compatiblewith an outward- oriented economy. The Ministry has four institutionalobjectives: (a) Increased productivity, product quality, and service; (b) Increasedforeign investmentand access to technology; (c) Increased capacity - xiv - to monitor industrialperformance; and (d) Stronger analyticalbases to formulate policy and to identify public sector obstacles to competitiveness. The responsibilitiesthe Ministry must undertake can be grouped into three categories: those which make the country internationallycompetitive and maintain a favorable investment climate; those which maintain and promote competition within the domestic market; and those which collect, analyze, and disseminateinformation in support of the other two.
45. 4.2.1 Investnent Climate. The general economichealth and political stability in a country, along with resourcesand markets, are the primary determinantsof industrialinvestment. In this regard, the Government'sreform program has eliminatedmany of the impedimentsto industrialinvestment, both domestic and foreign. There are areas where further policy changes would enhance Venezuela's internationalcompetitiveness:
* Tax Reform. Tax rates on corporateprofits are higher in Venezuela(50 percent)than they are in other countries which compete for investment. Legislationto reform the entire tax system is pending but, until it is passed, investors will defer decisions in cases where this would make a difference.
* Labor Legislation. Labor laws intrude heavily into employee and managerial freedom to negotiate terms and conditionsof employment. They impose requirementswhich make Venezuelanlabor less competitivewith other nations.
* Training and Education. The qualityof the labor force is as important to investors as the price. The NationalTraining Institute (INCE) and the public educationsystem need to implementprograms which will more efficientlyprepare Venezuelanlabor for employmentin modern industrialoccupations.
* Technology. Technology transfers have been inhibited by policies which discouraged foreign investmentand by import restrictions on capital goods. These policies have been reformed, and the DevelopmentMinistry shouldensure that no other governmentpolicies--such as outdatedpatent laws- will inhibit introductionof state-of-the-arttechnology in Venezuela.
* InvestmentPromotion. Venezuelahas much to offer, and this is becomingmore widely recognized internationally. Effective investmentpromotion, in conjunctionwith the private sector, may accelerate some decisions.
46. 4.2.2 Promotionof Competition. In a small economylike Venezuela's, the principal source of competitionis the world market, and the DevelopmentMinistry is responsiblefor continuingthe tariff reform. It is also importantto maintaina competitiveenvironment in nontradedgoods. Reformsof some laws and regulationscan contributeto a more competitiveeconomy:
* Patents and Copyrights. Venezuela's laws of intellectualproperty rights have been criticized for discouraging research and innovation and deterring foreign investors from introducing advanced technology. Legislation has been drafted to increase protection of intellectualproperty rights in Venezuela,and the DevelopmentMinistry should take an active role in advocatingappropriate changes;
* Product Standards. Weights and Measures. The DevelopmentMinistry, in setting standards, should look abroad toward internationalnorms which would maximizedomestic competition. This would be of the greatest benefitto consumers,who would have wider selection,and to domesticproducers who, by adapting to internationalnorms, would be able to compete in larger markets. - xv -
* MaximumRetail Price. The consumerprotection law requires-amongother things--thatmanufacturers set a maximum retail price (precio de ventaal pablico, PVP). It is not clear under what conditions the PVP protects consumers, and the requirement should be replaced with a provision which makes the PVP optional.
* Financial Sector Reform. An efficient financialsector facilitatesresource mobilizationand allocation. The financialsector reform shouldencourage internal competition, however, the DevelopmentMinistry should study with other affected Ministriesthe feasibilityof greater foreign ownershipof commercial banks.
* Bankruptcy. An important element of vigorous competitionis exit by firms which are unable to compete. This frees resourcesto move to more dynamic, expandingactivities and leads to a stronger, more competitiveeconomy. The DevelopmentMinistry should ensure that bankruptcyregulations and procedures are consistent with best internationalpractice.
* Antitrust Legislation. The strongest form of consumer protection would come from vigorous, competitivemarkets. As tariffs are reduced, internationalcompetition will reduce the prices of traded goods and drive producers' prices toward internationallevels. For domesticdistribution and for other nontraded goods, it may be desirableto rely on antitrustlegislation to enforce competitivenorms and behavior.
47. 4.2.3 Informationand Research. The DevelopmentMinistry should undertakea systematic inventory of the economic information and systems available in Venezuela and in other countries and shoulddevelop recommendationsto improve the qualityand availabilityof reliable data, and ensure that they are gathered and disseminatedin a cost-effectivefashion. Without such data it is impossibleto measure the effects of any policy, much less to approximatethe effects of alternativepolicies. In this regard, the DevelopmentMinistry should continueto give priority to computerizingits own records and making these availableto researchers who would be interestedin measuringthe effects of the policiesand economic decisions made during the 1980s. The Ministry itself does not have sufficient resources to analyze these data, but they would be of interest to an international body of scholars seeking to understandand measure the effects of Venezuelanindustrial policy during the 1980s.
March13. 1991 9:11am 1. INTRODUCIION
1.1 Between 1958 and 1972 Venezuela's non-oil GDP grew an average of 6.8 percent per year. Manufacturing(excluding oil refining) was the fastest growing sector, at a rate of 7.8 percent. This resulted from foreign investmentand import substitutionwhich reduced the share of imports in private consumptionfrom 30 percent at the end of the 1950sto three percent in 1970. In the 1970s and early 1980s,the Governmentwas awash in oil revenues. Bourginon(1989) estimates the windfallduring 1974- 78 averageda 20 percent increase annually above what GDP would have been without the boom, and, during 1979-82,27 percent of GDP. Over the nine years, the windfall totalled approximatelytwo years' GDP. These resources were supplementedby foreign borrowing, and Venezuela's external debt went from $1.5 billion in 1975to $38.2 billion in 1983. The $36.7 billion increase in debt is equal to about one-half of the 1988 GDP.
1.2 The Governmentsought to diversifythe industrialbase, reservingfor itself investmentin "strategic sectors" or "basic industries"-principallyaluminum, steel, and energy. Large public investmentswere made through the Venezuelan Investment Fund (Fondo de Inversiones de Venezuela, FIV) and the Venezuelan Corporation of Guayana (Corporacion Venezolana de Guayana, CVG). Direct foreign investmentwas discouragedor prohibited, and private investorswere encouragedto invest--generally--in domestic activities which would substitutefor imports and-specifically-in activitiesdownstream from the basic industries. This import substitutionwas encouragedby protectionthrough tariffs and licenses, by directed credit at below-marketrates, and by controls on investments.
1.3 When oil prices dropped in the 1980s, the bolfvar became overvalued, but it could not be maintained. In 1983, followinga series of currency crises and losses of foreign exchangereserves, the bolfvar was devalued and a multiple exchangerate system was introduced. Exchange controls, which were changed frequently, introduced a new layer o. discretionary incentives. Price guidelines and controls were applied throughout the economy. Some exports were prohibited, and the industrial incentivesdiscouraged most others. It was widely felt that the role of industry was to satisfy the local market and that only if there was a "surplus," could it be exported.
1.4 The layers upon layers of interventionproduced an uncoordinated,inefficient system characterized by contradiction,redundancy, and discretion. Through most of the 1980s, the industrial sector operated in an environmentin which governmentcontrolled every aspect of a firm's decisions: input prices and quantities, output prices, investments,and market access. Bourginon(1989, p. 322) has characterized this period as "... a dramatic failure of economic policy under complex yet seemingly exceptionally favorable conditions. Nothing appears to have been gained from the windfalls in terms of non-oil GDP *during1973-82. Consumptionhas been the only winner."
1.5 Table 1.1 shows the structure of production and domestic absorptionduring this period. Real GNP per capita (exDressedin 1980 US$), which was relativelystable during 1976-83, rose and fell with the terms of trade. In 1988 it was only 53 percent of its 1981 peak, and about 10 percent below the 1971-73average. Expressedin constantUS$, all sectors declined, but measured in 1980 bolivares, only the non-manufacturingindustrial sector declined: agriculture grew at an annual rate of 4.3 percent, manufacturingat 3.8 percent, and services at 1.8 percent between 1981 and 1988 (cf. World Tables. 1989-90). [2)
Table 1.1: Structure Qf Production and Domestic Absorption, 1971488. (Shown as a percertage of GDP in curnt bolivares)
1971-73 Ave. 1975 1976 1977 1978 1979 1980 1981 1 1983 1984 1985 1986 1987 198R ONP Per Capita Cumnt USS 1380 2380 2890 3160 3390 3730 4070 4730 4920 4790 4140 3790 3560 3230 32S0 1980 USS * 2520 3440 3930 4030 4020 4070 4070 4320 4220 3950 3290 2930 2680 2360 2300
GDP 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Agrculture 6 5 S 5 5 5 5 5 S 6 5 6 7 6 6 Indusry 42 47 46 45 43 46 46 44 42 39 42 39 37 38 36 Manufacturing 17 16 16 IS IS 16 16 15 16 16 19 21 23 22 22 Services 56 48 50 50 52 49 49 51 53 56 53 55 56 56 58
Domesic Absorption 98% 93% 99% 107% 111% 99% 93% 9S% 103% 92% 89% 90% 100% 99% 106% Private Consumption 53 49 S1 52 S6 S4 SS 58 62 68 62 63 69 6S 66 Gen'lGovt.Cons. 12 11 12 12 12 11 12 13 13 12 11 10 11 10 10 Gross Dom. Inv. 33 33 36 43 44 33 26 24 28 12 16 17 20 24 30 PrivateInvestment 24 22 20 26 25 18 12 8 8 -3 7 6 7 12 16 PublicInvestment 9 11 16 17 19 IS 14 16 20 15 9 11 13 12 14
Gross Dom. Savings 39% 40% 37% 36% 33% 3S% 33% 29% 25% 21% 27% 27% 20% 2S% 25%
Gov't Spending .3 14 13 13 14 14 IS 18 18 18 19 18 17 n/a rJa Gov't Surp. (Deficit) 0 1 (2) (4) (3) 2 0 (1) (4) (1) 3 5 (2) n/a n/a
ResourceBalance 6% 7% 1% -7% -11% 1% 7% 5% -3% 8% 11% 10% 0% 1% -6% ExportsGNFS 24 29 26 23 20 26 29 27 22 20 28 26 21 22 22 Petroleum 22 27 24 22 19 25 27 25 21 18 27 24 17 19 17 ImportsGNFS 18 22 25 30 32 25 22 22 25 11 17 16 21 22 27
TermsofTrade(1980=100) 18 58 62 62 S5 69 100 112 105 97 96 93 48 54 42
Real ExchaneeRate (1973= 100) Generallmpotts 100 98 94 91 94 97 92 83 77 95 101 91 89 117 94 NontraditionalExpts.** 100 97 94 91 96 98 93 84 77 177 190 168 223 17S 144
ManufacturingActivity (1980= 100) Employment 52 69 82 88 91 99 100 90 91 90 88 89 92 n/a n/a Real Output/Employee 109 10S 106 106 110 102 100 114 117 116 111 109 106 n/a n/a
* Weighted by U. S. GDP deflator. *# Exchange rate for nontraditional exports reflects government subsidies. Source: World Tables, 1989-90; Venezuela: Country Economic Memorandum.
1.6 The oil windfalls paid for an immediate and sustained increase in private consumption. Before the windfalls, private consumption averaged 53 percent of GDP. As GDP rose, consumption rose faster: the percentage given to consumption rose to a peak of 68 percent in 1983. Even after real income had fallen in 1987 and 1988 below the 1971-3 average, consumption remained at 65-66 percent of GDP. This consumption came from reduced domestic savings (from 39 percent of GDP to 25 percent) and reduced private investment. (3J 1.7 Under the government'seconomic policies, incentivesto save were minimaland there were few profitable investmentopportunities. With the interestrate and exchangerate regimes whichprevailed between 1983 and 1988, it was generally more profitable to borrow at fixed rates in Caracas, convert the money to dollars, invest in a certificateof deposit in Miamifor three months, and then convert the dollars to bolivares to repay the loan. (See Box 1). Private investmentfell from 24 percent of GDP in 1971-3 to an average of seven percent during 1980-86. Imports of capital goods dropped by 60 percent during 1983-87from 1982 levels (Table2.1). The upturn in private investmentin 1987 and 1988 resulted from inventoryaccumulation in anticipationof the 1989devaluation, and most of the resulting inventorieswere liquidated or exported after the devaluation. Public investmentrose and fell but, in percentage terms, was never enough during the 1980s to offset the decline in private investment.
Table 1.2: Structure of Production-International Compasons, 1965-87.
Industry Agriculture Services 1965 1987 Chanc 1965 1987 Changee 1 1987 Chanc
Venezuela 40% 38% -2% 6% 6% 0% 55% 56% 1% Argentina 42 43 1 17 13 -4 42 44 2 Peru 30 33 3 18 11 -7 53 56 3 Brazil 33 38 5 19 11 -8 48 51 3 Mexico 27 34 7 14 9 -5 59 57 -2 Colombia 25 35 10 30 19 -11 46 46 0 Turkey 25 36 11 34 17 -17 41 46 5 Thailand 23 35 12 32 16 -16 45 49 4 Singapore 24 38 14 3 1 -2 74 62 -12 Korea 25 43 18 38 11 -27 37 46 9 Indonesia 13 33 20 56 26 -30 31 41 10 Nigeria 13 43 30 54 30 -24 33 27 -6
Soure: World Development Reron. 1989.
1.8 Relative to 1973, the bolfvar was overvaluedthroughout the period, except in 19834 and 1987 when there were major devaluations. Imports boomed and domestic producers were at a disadvantagein competingagainst them until 1983 when the currencycrises led to exchangecontrols and increased protection. An export subsidy introduced in 1983 permitted exporters to receive a more favorable exchangerate, and led to noticeableincreases in private, nontraditionalexports. Employment in the manufacturingsector, which had doubledbetween 1971-3and 1980 dropped by about ten percent in the 1980s, and labor productivity(real output per employee) in 1986 was slightly below what it had been fifteen years earlier. [31 1.7 Under the government'seconomic policies, incentivesto save were minimaland there were few profitableinvestment opportunities. With the interestrate and exchangerate regimes whichprevailed between 1983 and 1988, it was generally more profitable to borrow at fixed rates in Caracas, convert the moneyto dollars, invest in a certificateof deposit in Miamifor three months, and then convert the dollars to bolivares to repay the loan. (See Box 1). Private investmentfell from 24 percent of GDP in 1971-3 to an average of seven percent during 1980-86. Imports of capital goods dropped by 60 percent dur.ng 1983-87from 1982 levels (Table 2.1). The upturn in private investmentin 1987 and 1988 resulted from inventoryaccumulation in anticipationof the 1989devaluation, and most of the resulting inventorieswere liquidated or exported after the devaluation. Public investmentrose and fell but, in percentage terms, was never enough during the 1980s to offset the decline in private investment.
Table 12: Structure of Production-International Comparisons, 1965487.
Industry Agriculturm Services 196S 1987 Chanze 1965 1987 Chane 1965 1987 Change
Venezuela 40% 38% -2% 6% 6% 0% 55% 56% 1% Argentina 42 43 1 17 13 -4 42 44 2 Peru 30 33 3 18 11 -7 53 56 3 Brazil 33 38 5 19 11 -8 48 51 3 Mexico 27 34 7 14 9 -5 59 57 -2 Colombia 25 35 10 30 19 -11 46 46 0 Turkey 25 36 11 34 17 -17 41 46 5 Thailand 23 35 12 32 16 -16 45 49 4 Singapore 24 38 14 3 1 -2 74 62 -12 'Korea 25 43 18 38 11 -27 37 46 9 Indonesia 13 33 20 56 26 -30 31 41 10 Nigeria 13 43 30 54 30 -24 33 27 -6
Souce: World DevelopmentReport. 1989.
1.8 Relative to 1973, the bolfvar was overvaluedthroughout the period, except in 19834 and 1987 when there were major devaluations. Imports boomed and domestic producers were at a disadvantagein competingagainst them until 1983 when the currency crises led to exchangecontrols and increased protection. An export subsidy introduced in 1983 permitted exporters to receive a more favorableexchange rate, and led to noticeableincreases in private, nontraditionalexports. Employment in the manufacturingsector, which had doubledbetween 1971-3and 1980 dropped by about ten percent in the 1980s, and labor productivity(real output per employee)in 1986 was slightlybelow what it had been fifteen years earlier. l 5 ] 1.9 Venezuela's recent industrial performance compares unfavorably to other nations'. Table 1.2 shows the structure of production of ten developingcountries in 1965 and in 1987. In 1965, Venezuelaand Argentinawere the most industrialized. However, Venezuela's industrialsector declined during the period while tne other nations became more industrialized. The Latin economiesgenerally trailed the non-Latinnations in this sample, but Venezuela'sdecline in industrialoutput from 40 percent to 38 percent of GDP is in sharp contrast to all the other nations. It should also be noted that Venezuela's agricultural sector, already a small percentage of GDP in 1965, was the only one not to contractover the period. This reflectsthe heavy agriculturalsubsidies during the Lusinchi Administration (estimated elsewhere (World Bank 1988a) to be as high as two percent of CDP) which restored the agriculturalsector from five percent of GDP in 1975-82to six-to-sevenpercent during 1985-88.
Table 1.3: Per Capita Manufactured Exports: 1980, 1987. (Shown in 1987 USS)
Growth Growth 1980 1987 Rate 1980 1987 Rate
Peru $53 $23 -11% Brazil $88 $83 -1% Chile 55 36 -6 Mexico 43 119 16 Colombia 43 37 -2 Turkey 24 131 27 Venezuela 30 48 7 Malaysia 245 428 8 Argentina 82 54 -6 Korea 565 1035 9 Thailand 55 80 6 Singapore 5966 7876 4
Source: World Bank Staff calculations based on World Develooment ReMort.1989.
1.10 The internationaltest of a nation's industrialsector is its ability to compete in exporting into world markets. Table 1.3 shows per capita manufacturedexports for twelve nations, measured in constant US$. Becauseof their long-standingpolicies of inward-orienteddevelopment, Latin American nations generallyrank near the bottomboth in terms of value of manufacturedexports and rate of growth: five of the seven nationsshown had lowerper capita manufacturedexports in 1987than they did in 1980. While Venezue!a.'srate of increase was about in the middle of this group of countries, almost all the manufacturedexports and the growth was from state-ownedsteel and aluminumprojects.
1.11 Venezuela's inabilityto compete in world manufacturedexports is not surprising in light of its decline in productivity. Table 1.4 shows internationalcomparisons of real manufacturingoutput per employeefor 1972 and 1986. Of the sevencountries, Venezuelawas the only one where productivity declined. (Note that the data in Table 1.4 are index numberswith 1980 = 100. Consequently, in both Venezuelaand Turkey, productivity declined between 1972 and 1980 and then increased from 1980 to 1987. In most countries, the increasefrom 1972 to 1980 was greater than that from 1980 to 1987).
1.12 These outcomes can be related to the Government'seconomic policies. The purpose of this study is to review industrial policies and performanceduring the 1980s, to describe the adjustment program and the outstandingissues, and to recommend industrialpolicies for the 1990s consistent with [61 the trade and financial sector reforms. In Chapter 2, the policiesof the 1980s are described and related to the industrial incentives, and the reforms of 1989-90are discussed. This chapter also contrasts the policies of the 1980s with the new policies of the PNrezadministration. Chapter 3 uses firm-level data from the Venezuelanindustrial survey to measure the strengthof the effects of the industrialpolicies, and Chapter 4 discusses some outstanldingissues for industrialpolicy.
Table 1.4: International Comparisons of Productivity. (Rcea!Manufacturing Output per Employee, 1980= 100)
1972 :986 Chanec 1972 1986 Chance
Venezuela 108 106 -2% Colombia 92 137 49% Mexico 85 107 26% Singapore 61 111 82% Argentina 77 103 34% Korea 49 159 224% Turkey 115 158 37%
Source: World Tables. 1989-90.
1.13 This report focusses on the private industrial sector. T'he public sector in Venezuela generated 26 percent of GDP in 1988. Most of this was from petroleum, gas, and refining, but state- owned enterprises also produced nine percent of goods and 18 percent of services. The World Bank and the Govermmentof Venezuelahave recently negotiateda loan for public enterprisereform. This report touchesupon the public sector in Chapter 2, where there is a discussionof its size and some of its effects on private development,and in Chapter 3, where there are comparativeanalyses of the performanceand characteristicsof the public and private sectors.
Matc 11. 199& PMl 2. INDUSTRIAL POLICY: THE 1980S AND THE REFORm
2.1 During the 1980s-particularlyafter the introductionof the multiple exchangerate system in February 1983--the Venezuelan Government managed industrial policy through a comprehensive, uncoordinatedseries of ad hoc instrumentswhich were orimarily intendedto achieveobjectives other than efficient industrialdevelopment. Entrepreneurialdiscretion was sharply restricted and firms' success depended more on bureaucraticwhim than on a market test of efficiency of production or distribution. Governmentlimited managerialprerogatives in significantways:
* The prices and quantities of imported inputs were contz^?'edby licenses, tariffs (which could be reduced upon application), government import monopolies, and foreign exchange allocations. Government allowed domestic producers to prevent importation of competing merchandise. Domesticallyproduced inputs were subject to price controls. Labor costs and terms of employment were controlled by distortinglabor laws.
* Outputprices were regulatedand foreign competitionwas restrainedbv importprohibitions, licenses, and foreign exchangeallocations.
* Investmentsto expandproduction or to enter new markets were regulated. Governmentpermits gave investors concessionalcredit, imported inputs, and preferential foreign exchange. Investments in certain geographicregions were discouraged. e Exports were discouraged and permits were necessary. Exporters received the official--ratherthan the free market-exchange rate, but were eligible for an offsetting subsidy plus preferentialcredit. The incentive regime and rates were frequently changed and exporters were unable to predict accuratelytheir export receipts more than a few weeks in advance.
2.2 There was a benevolentintention and an internal logic-albeit, misguided-to the policies. The multiple exchange rate system was meant to protect consumers, permitting preferential rates for "essential"items such as food, clothing, medicines,or inputs into their production. The importcontrols and tariff exonerations were meant to protect employment and production, ensuring that there were sufficientimported inputs and an absence of foreign competitionto keep industry employed. With no foreign competition,price controls were intended to protect consumers against monopolisticpricing. Further, the price controls were thought to be necessary to ensure that the benefits of the preferential foreign exchangewould be passed on to consumers. However, where items were being subsidized, it was necessaryto prohibit their exportationso that only Venezuelanresidents would benefit. Finally, with investorsentitled to concessionalcredit and other subsidiesto capital, investmentcontrols would ensure that there would not be too much investment.
2.3 These policies, though well-intended, built distortions upon distortions and increasingly substitutedgovernmental discretion and judgement for market-basedtransactions. For the policiesto have been efficientlyadministered, they would have demandedinformation and analyticalresources which are beyond the reach of any government. There is no example of a government which has efficiently administeredsuch policies, and many examplesof governmentswhich have failed.
2.4 The concentrationof power in governmentalministries left wide discretionand in somecases fostered corruption. Businessmenfound the most profitableuse of their time to be seekingprivileges (or [ 8 ] preventingtheir competitorsfrom receiving concessions),and visitorsto economic ministriescommonly found queues of well-dressedexecutives waiting outside offices for hearings on applications for some privilege which officials were empowered to grant. While these policies were meant to serve the Venezuelanconsumer, they imposedadditional business costs on the industrial sector which were passed on to labor, in the form of unemployment,and to consumers in higher prices, lower product quality, poorer service, and a reduced range of goods and services.
2.1 Trgde Policy
2.5 The principal and most pot-nt instruments of industrial policy during the 1980s were administeredthrough internationaltrade policy--exchangeallocations, import licenses and delegations, tariff exonerations,and export incentives. Despitelarge export subsidies,the import controls created an anti-exportbias and the industrialsector had little incentiveto compete in internationalmarkets.
2.1.1 Import Restrictions
2.6 For someoneto import most items into Venezuela,he had first to obtain an import permit (a license or a delegation)from the Developmentor the AgriculturalMinistry. This would be granted only if domestic producers did not object. Since tariffs were prohibitive, he had to apply for an exonerationwhich would reduce the tariff to a reasonablelevel. Then, he had to apply to an agency of the Finance Miristry for foreign exchangeat one of the preferentialrates.
2.1.1.1 Foreign ExchangeControls
2.7 From 1973to February 1983, Venezuelamaintained a fixed exchangerate of 4.3 bolivares to the US$. The bolfvar became incroasinglyovervalued (see the real exchange rate indices in Table 1.1), and in early 1983 there were a series of currency crises which were resolved by introducing the multiple exchangerate system which was maintainedthrough early 1989. Initially, the rate of 4.3 Bs./US$ was retained for the petroleum sector, "essential" imports, Pid foreign debt service. An "official" rate of 6.0 applied to most commercialtransactions, and a free market rate (which varied between 7.5 and 17.0 during the first year) appliedto nontraditionalexports, tourism, and capital. The official rate was raised to 7.5 in March, 1984, and subsequentlyto 14.5 in December, 1986, and there were numerous movementsof items among categories. At one point, there was the 4.3 rate for foreign debt, a 6.0 preferential rate, the 7.5 official rate, and the free market rate. Over 1984-88the free rate ranged from 60 percent to 200 percent above the official rate, averaging 110 percent (see Box 1). In February, 1989, the multipleexchange rates were unified and the exchangerate was floated.
2.8 Table 2.1 shows the foreign exchangesales by the Central Bank at the various rates during 1984-87. It also shows the average exchangerates for sales and for purchases. Collins (1988) points out that the multipleexchange rate systemaltered relative prices, effectivelytaxing sometransactions and subsidizingothers. In 1986, for example, the average purchase rate was 8.5 and the average sales rate was. 8.7 so that sales of dollars were subsidized by purchases (predominatelypetroleum exports). However, not all sales were subsidized. The 7 percent of sales which received the preferential rate of 4.3 (debt repayment) were subsidizedby about 50 percent, those sales at the official rate of 7.5 were subsidizedby 12 percent, and sales at the free rate (averaging 19.7) were taxed at 130 percent. Over the four years, the CentralBank's sales of foreign exchangeexceeded purchases and there was a net reduction of $2.1 billion of internationalreserves. 191
Table 2.1: Foreign Exchange Sales and Exchange Rates, 1984-87. (Billions of USS)
Rate (Bs./US$) 1984 1985 1986 1987
4.3 $5.0 (31%) $1.6 (11%) $1.0 ( 7%) $ .8 ( 5%) 6.0 2.4 (15%) 1.4 ( 9%) 7.5 7.1 (45%) 10.0 (70%) 11.7 (81%) 6.8 (41%) 8.7 1.0 ( 6%) 14.5 7.1 (43%) Free Mkt 1.5 ( 9%) 1. (10%) 1.7 (12%) .7 (4%) TOTAL $16.0 $14.3 $14.4 $16.3
Averaze Rates Free Market Sales 13.4 14.0 19.7 27.0 All Sales 6.8 7.7 8.7 11.2 All Purchases 6.1 6.5 8.5 11.9
Source: BCV.
2.9 Merchandiseimports accountedfor about half of the C>ntralBank's foreign exchangesales between 1984 and 1987. Table 2.2 shows the average exchangerate which applied to each category of merchandiseimports each year during 1983-88, together with imports in US$. For each category, an exchangerate index was calculatedby dividingits average exchangerate by the average for all imports in the year. An index above 100 indicatesthat the average exchangerate effectivelytaxed importers of that class of goods in order to subsidize importers of goods with indices below 100. This tax/subsidy is in addition to any subsidy provided generally for sales of dollars by taxing the purchase of dollars. The last three columns show for 1983-88:average import levels; average import levels as a percentage of 1981-82imports; and the (unweighted)average of the six ai'nual exchangeindices. Table 2.2 reveals much about the distortionswhich the exchangeregime imposedon the industrialsector during the 1980s.
2.10 Merchandise imports peaked in 1981-82. Imports declined by 50 percent in 1983, then increasedgradually through 1987. There was a relativelylarge increasein 1988, made up mostly of raw materials (up 40 percent), capital goods (up 24 percent), transportationequipment (up 41 percent), and consumer durables (up 100 percent) in anticipationof the devaluationof 1989. Over 1983-88, imports averaged 68 percent of the 1981-82level.
2.11 The structure of imports in Table 2.2 reflects the intensificationof the import substitution under the industrialpolicies of the 1980s. While imports during 1983-88 were only 68 percent of 19 1-82 levels, raw materials actually increased (103 percent), capital goods were relatively unaffected(68percent) while final goods were below 68 percent: food (38 percent), alcoholic beverages (53 percent), and consumptiongoods (55 percent). The categoryof transportationequipment illustrates most clearly the import substitutionbias, with assembledunits cut sharply while materials for the I to I
Tuble 2.2: Imports by Type and Exchange Rates, 1981-88. (Imports in Billions of USS)
1981-2 1983 1984 1985 1986 1987 1988 1983-88: A.&. kw,rt. A.g. AVg F.Adwng Fxdw.p: Etxedbu: Exduo: Exdu: USS S of F.ci. In48 bnpu Rateh c Indhiex hm- Rate hRidncx Ima FtRe Index blots Rat 1ex IIYCXI Rawctndcx 1 142 W¢dx ilOTrAl. $11.7 $5.8 5.8 100 S7.0 6.8 100 57.3 7.6 100 57.7 - 100 $8.7 13.2 100 $11.5 18.6 100 $8.0 680k 100
Ran MhideriaIs $3.0 $2.1 5.1 87 S3.0 6.1 90 $2.7 7.0 92 $2.6 7.9 90 53.4 12.1 91 $4.8 15.8 85 53.1 103% 89 inidtilir 2.7 1.8 4.9 85 2.5 6.1 90 2.3 7.1 94 2.1 8.0 91 2.9 12.4 94 4.3 16.0 86 2.7 99% 90 Agriculturc .2 .2 4.3 74 .2 5.0 74 .2 6.2 82 .3 7.5 85 .4 9.4 71 .3 12.4 67 .3 118% 76 EK.tri,it) Nianing.1 .2 7.5 129 .2 7.4 109 2 6.5 86 .2 7.4 84 .2 12.9 98 .2 15.3 82 .2 2124 98
C:naital(oods $3.1 $1.3 6.6 113 $1.5 7.3 108 $3.9 8.0 lOS $2.3 9.1 104 $2.5 14.1 107 $3.1 20.2 109 52.1 68% 108 Induibtry 2.5 1.1 6.6 113 1.3 7.3 108 1.7 8.0 106 2.0 9.3 105 2.2 14.1 107 2.6 20.5 110 1.8 72% 108 Agriculture .2 .0 5.0 86 .0 7.0 103 101 .1 7.8 s 105 .1 20.0 108 .1 40% ElcctriJiq/Mining .3 .1 7.0 119 .1 7.4 109 . i.Y/ 104 .2 8.5 9# .L 14.3 108 .3 17.8 96 .2 59% 106
Tr.msnwort IlnDt. $1.9 S.9 7.1 122 5.9 7.3 108 $1.0 7.6 99 $1.4 8.1 91 $1.2 14.4 109 $1.7 20.9 113 53.2 63% 107 Automilotive 3.5 .7 7.1 122 .8 7.3 108 .8 7.6 99 1.1 7.9 90 1.0 14.4 109 1.2 20.7 III .9 64% 107 Assnb1edAutos I .0 5.5 94 .0 7.0 103 .0 7.7 101 .0 7.9 *30 .0 13.7 104 .0 20.5 110 .0 19% 100 Asscmb1cdCargo4 .1 6.2 107 .0 6.8 100 .1 7.5 99 .2 7.6 86 .1 1.'.4 102 .2 19.2 103 .1 27% 99 CKD's--Autos .6 .4 7.4 127 .5 7.4 108 .4 7.5 99 .6 7.6 86 .5 14.2 108 .5 20.4 110 .5 75% 106 CKD's--Cargo .0 .1 7.6 129 .1 7.4 108 .1 7.5 98 .1 7.6 86 .1 14.5 109 .1 20.5 110 .1 213% 107 Parts/Access. .3 .1 7.1 123 .2 7.4 109 .2 7.8 102 .2 9.1 103 .3 15.1 114 .4 21.5 116 .2 89% III Other 4 .2 7.0 119 .2 7.3 108 .2 7.5 99 .2 8.8 99 .2 14.6 III .5 2!.5 116 .2 60% 109
Cowstruction.Mi 5.2 6.1 10S 5.2 7.3 108 5.2 7.5 99 5.2 8.2 93 5.313.7 103 S.3 19.4 104 5.2 24% 102
FoodProd':cts 5.5 4.7 80 5.6 S.0 73 S.5 5.7 74 5.2 9.0 102 5.3 9.9 75 5.1 18.7 101 5.4 38% 84 Basic .4 4.5 78 .4 4.6 68 .3 5.2 68 .1 8.8 100 .2 9.3 71 .1 17.6 95 .2 39% 80 Non-basic .3 .1 5.2 89 .1 6.0 89 .2 6.4 83 .1 9.1 103 .1 10.6 81 .0 21.8 117 .1 38% 94
Alcohol/Bvgc. 5.1 5.1 8.3 142 5.1 12.4 183 5.1 13.2 174 5.1 19.9 225 $.1 17.1 129 5.1 21.9 138 5.1 53% 162
Comistalilotioal $3.8 5.7 5.8 99 5.8 8.2 120 $1.0 9.2 121 51.0 10.9 124 53.0 13.9 105 $1.4 21.4 115 $3.0 55% 114 Luxury .7 .2 6.1 104 .2 9.3 137 .3 9.7 128 .3 12.1 137 .3 14.2 107 .3 20.7 112 .3 37% 121 Durable .3 .1 5.6 95 .1 8.1 119 .2 8.9 117 .1 9.9 113 .2 13.0 99 .2 19.7 106 .1 45% 108 Non-Durable .4 .1 6.6 113 .1 10.4 153 .1 11.0 144 .1 15.0 170 .1 135.8119 .1 22.3 120 .1 30% 137 Non-Luxury 1.1 .S 5.7 97 .6 7.8 114 .7 9.0 119 .7 10.6 120 .7 13.8 104 1.0 21.6 116 .7 67% 312 Durable .5 .2 5.6 96 .2 7.4 109 .3 8.2 108 .3 9.5 107 .3 14.5 110 .7 21.9 118 .3 65% 108 Non-Durable .6 .3 5.7 98 .4 7.9 117 .5 9.5 123 .4 11.4 129 .4 13.3 100 .4 20.9 113 .4 68% 114
Note: Exchange indices were calculatedby dividing eachcategory's average exchange rate by the averagerate for all transactionsin the year. An indcx greater than 100 indicatesthat importers of that item imponted relatively more at the free market rate and an index lcss than 100 indicatesthat relatively more imports were at the official rate. Source: OCEI, Anuario del Comercio Exterior de Venezuela,various years. [11l assembly industry rose absolutelyor, at least, relative to the decline in imports: assembled autos were 19 percent of 1981-82levels and assembledcargo vehicles were 27 percent, while automobileCKD kits were 75 percent and cargo vehicle CKD's were 213 percent. Motorvehicle sales were 163,000units in 1982, and fell 25 percent to an average of 122,000units over 1983-88.'
2.12 Over 1983-88,the relativelymost heavilysubsidized commodities through the exchangerate were foods and raw materials. By contrast, the most heavily taxed were consumer goods--particularly "luxuries"--and alcoholic beveiages. Capital goods and transportation equipment were taxed about equally. This pattern of taxing consumptiongoods and subsidizinginputs could increase the protection for domestic production. The Foreign Trade Instituteestimated that the average domestic value added in Venezuelawas 65 percent. For a good with 65 percent domestic content, an 11 percent subsidy to inputs together with a 14 percent tax on outputs would, by itself, lead to effective protection of 27 percent. However, the foreign exchange system effectively imposed a tax on importers of consumptiongoods which averaged between 8 percent (durables) and 37 percent (non-durableluxury goods) so that effective protection rates would be in the range of 18 percent to 64 percent. Effective protection would also vary with the level of domesticvalue added. In the case of goods wherethe value added is 35 percent, effectiveprotection on consumergoods wouldbe higher: in the range of 23 percent to 106percent. Consequently,the exchangesystem distortedprices, conferring the greatest benefits on producersof low value-added,non-durable luxuries such as cosmeticsand toiletries. Alcoholicbeverages enjoyedparticularly large nominalprotection-as high as 125 percent in 1986-throughthe exchangerate.
2.13 In the case of agriculture, it wouldappear that protectionthrough the exchangeregime was lower than that provided to industry. Agriculturalinputs were more favored through the exchangerate. However, since food importsalso entered at favorablerates, effectiveprotection was lower and, in cases, could even have been nega.ive. For example, in 1984 (1985), agriculturalinputs entered at an average exchangerate of 5.0 Bs./US$ (6.2), while "basic" foods entered at 4.6 (5.2).
2.14 In 1986all merchandiseimports entered either at the official rate of 7.5 Bs./US$ or at the free market rate which varied between 14.9 and 27.1 Bs./US$, with an average for the year for all transactionsof 19.7. Assuming that all import categories paid about the same average free rate, it is possible to infer from Table 2.2 the percentage of each type of merchandisewhich was imported at the free market rate in 1986. These percentages are shown in Table 2.3. (In other years imports entered at multipleofficial rates and we cannot reproduce these calculationswith existingdata.)
2.15 For most categoriesof merchandise,sufficient foreign exchangewas availableat the official rate so that importers resorted to the free market only occasionally. However, alcoholic beverages entered exclusivelyat the free rate and nearly 30 percent of consumergoods imports had to use the free market. Capital goods for industry, parts and accessories for transportationequipment, and non-basic foods also had above-averageuse of the free market rate. The system promoted the consumption(and discouragedthe production)of the subsidizedgoods while discouragingthe consumption(promoting the production) of the taxed goods. Since the purpose of the preferential exchangerates was to assist the poor, the system's incentives were perverse: they encouraged the consumptionand discouraged the production of "essential"commodities-food and pharmaceuticals.
'Under the adjuatmentprogram, CKCDkits were removed from the official exchangemte (14.5 Bs./USS) and paid the free market rate(35-40 Bs./US$). Sales fell to 26,000 units in 1989. [ 121
Table 2.3: Percentage of 1986 Imports at Free Market Rate. (Imports in Billions of USS)
% at Free % at Free Imports Market Imnorts Market
Raw Materials $2.6 3% Construction Mtl. $ .2 5% Industry 2.1 4 Agriculture .3 0 Foods $ .2 12% Elect./Mining .2 0 Basic .1 11 Non-basic .1 13 Capital Goods $2.3 13% Industry 2.0 15 Beverages $ .1 100% Agriculture .1 3 Elect./Mining .2 8 Consumption Goods $1.0 28% Luxury .3 37 Transport Eqpt. $1.4 5% Durable .1 20 Automotive 1.1 3 Non-Durable .1 61 Assembled Autos .0 3 Non-Luxury .7 25 Assembled Cargo .2 1 Durable .3 16 CKD's-Autos .6 1 Non-Durable .4 32 CKD's-Cargo .1 0 Parts/Access. .2 13 Total $7.7 11% Other .2 10
Source: World Bank staff calculations based on Tables 2.1 and 2.2.
2.16 The exact protective effects of the exchange system would depend on how it was administered. For example, if preferentialexchange were granted automaticallyto all imports of a given tariff item or to a specific category of imports, and importers could import all they wanted of the item, then (assuming internal distribution is sufficiently competitive)the domestic price should completely reflect the benefits.of the preferential exchange, and domestic producers of the item, or of substitute items, would be penalized.
2.17 This is not how foreign exchangewas allocated. Instead, importers had to apply on a case- by-case basis to the Office of the DifferentialExchange Rate Regime(Oficina del Regimen de Cambios Diferenciales,RECADI) and its successororganization (commonly called ex-RECADI). Theirprocedures changed frequently. Initially RECADI issued an average of 7500 foreign exchangepermits and 5000 extensionsa month. There were no clear criteria for processingapplications, and no applicationswere granted automatically. There was only a general sense of priorities: (1) Food and medicine; (2) Raw materials; (3) Intermediategoods and CKD kits; (4) Capital goods; and (5) All others. These priorities are consistentwith the averageexchange indices Oast columnof Table 2.2) over 1983-88and, exceptfor foods, they are consistentwith the data for 1986 shown in Table 2.3. [ 13 1 2.18 With excess demand and no clear criteria or guidelines, RECADI resorted to delays and excessive formalityto allocateforeign exchange. Applicationswith erasures or white-out were returned without being read, but only after a six- or eight-weekdelay. One applicationwas returned because the bank submittingit had applieda rubber stamp, perfectly legible, two inches to the left of where it should have been stamped. The applicationwas retyped, restamped, resubmitted,and subsequentlyapproved, but with an additional two months' delay. Where there is excess demand, it is possible to satisfy everyone--eventually-ifthey wait long enough. Delays at RECADI typically extended to six months. In December 1986, RECADI announced that all applicationswhich had not been approved had to be resubmitted. Importers who had waited as long as nine monthshad to begin anew their wait for foreign exchange.
2.19 RECADI was replaced by an agency, so similar in personneland policies that it was called "ex-RECADI,"which soughtto administerfirm-specific foreign exchangebudgets. In theory, each firm had an annual budget and requestsfor withdrawalswould be automatic. Budgetrequests were submitted through trade associations,promoting the cartelizationof industries. The requestswere about double the availableexchange--$6 billion in 1987. There were no clear criteria for choosingamong enterprises and budgets tended to be allocatedaccording to the previous year's import levels, thereby reducing internal competitionand servingas a barrier to entry. Ex-RECADIdid not operate automatically,although delays were reduced. This regime encouragedand rewardedcheating and corruption.
2.20 Enormouseconomic power was vested in RECADI and ex-RECADI. An importer denied exchangeat the officialor preferentialrate had to purchasefree market dollars. The spread between the official and the free market rates averaged 112 percent (see Box 1 in Chapter 1). Some domestic manufacturerssaid they didn't care whether the DevelopmentMinistry granted import licenses or tariff exonerations. They would rely on RECADI to refuse importerspreferential dollars for their products- comparable to an import tariff which averaged 112 percent. On the other side, importers seeking exchange at the official rates were looking at a benefit equal to 112 percent of the exchange they received.
2.21 Table 2.4 contains estimatesof the benefits for merchandiseimporters which were given through the preferential exchangesystem during 1984-87. There are separate estimates of the benefits for all merchandise imports and for "discretionary" merchandise imports--those categories where RECADI exercisedgreater discretion among exchangerates as evidencedby 10 percent or more of the imports entering at the free market exchangerate in 1986 (see Table 2.3). The benefits were calculated by multiplyingthe imports (measured in US$) times the difference between the average exchange rate and the average free market rate in the year. The benefits are expressedas a percentage of GDP. These calculationsoverestimate the benefits actually receivedbecause many of the imports, if they had to pay the free market rate, would not have taken place. Further, if there had been a unified exchangerate, it likely would have been lower than the average free market rate which prevailed. (When the exchange rates were unified in February 1989, the unified rate was 36 Bs./US$-between the official rate of 14.5 and the free market rate of 39).
2.22 Notwithstandingthese caveats, the magnitudeof the benefitswas large. For all merchandise imports, the benefits averagednearly 15 percent of GDP and for the importswhere RECADIexerted the greatest discretion, benefits averaged six percent of GDP. While the Government'sgoal was to reduce prices to consumers,the benefits may have gone to importers, to distributors,or to domesticproducers. For any given imported item, the market price may be determined by the exchange rate, whether the license was a binding constraint, whether the tariff was exonerated, or whether the price control was [ 14 1 binding. For a thorough understandingof the protectiveand distributiveeffects of the multipleexchange rate system, it would be necessary to analyze the foreign exchange decisions-both affirmative and negative-by importer and commodity,in conjunctionwith the decisionson import licenses and on price controls by the DevelopmentMinistry. Someof the complicationsin untanglingthe effectsof this regime are discussed in Section 2.1.5.
Table 2.4: Benerits to Merchandise Importers from the Preferential Exchange Rate, 198447.
1984 1985 1986 1987
(1) Average free market rate 13.4 14.0 19.7 27.0 (2) GDP (Be., BiUion) 409.5 464.6 493.8 718.0
All MerchandiseIm2orts: (3) Average ExchangeRate 5.8 6.8 7.6 8.8 (4) ExchangeRate Preference [(1) - (3)1 7.6 7.2 12.1 18.2 (5) MerchandiseImports (USS, Billion) 5.8 7.0 7.3 7.7 (6) Exchangebenefits (Bs., Billion) [(5) x (4)1 43.8 50.6 88.2 139.4
(7) Excbange benefits as% of GDP (6) (2)1 10.7% 10.9% 17.9% 19.4%
'Discretionary' MerchandiseImports: (8) AverageExchange Rate 7.1 8.0 9.7 13.9 (9) ExchangeRate Preference [(1) - (8)1 6.3 6.0 10.0 13.1 (10) 'Discretionary' Imports(USS, Billion) 3.0 3.5 3.6 4.0 (11) Exchangebenefits(Bs., BiUion) [(10) x (9)] 18.9 21.1 36.2 52.6
(12) Exchange benefits as % of GDP [(I1) / (2)1 4.6% 4.5% 7.3% 7.3%
Note: "Discretionary"merchandise imports were those categorieswhere RECADIappeared to have the greatest discretionin grantingpreferential exchange: 10%or more of the importsentered under the free market rate in 1986-industrialcapital goods; automobileparts and accessories;other transpoaion equipment;foods; and consumptiongoods (see Table 2.3). Source: World Bank Staffcalculations based on data in Tables 2.1 and 2.2.
2.1.1.2 Non-tariff Barriers
2.23 In 1982 Venezuela prohibitedthe import of one percent of the items in the tariff code, required a licensefor six percent, and the remaining93 percent were either freely importableor required a health permit. This changed abruptly in 1983 when eight percent of items were prohibitedfrom import and another 34 percent were reserved for importationby the Governmentand required a license in the form of a delegation of the Govermment'sright to import.2 By the time of the 1989 trade reform,
'Delegationswere used for commoditieswhere the Governmentwanted to restrict imports from membersof the Andean CommonMarket. Since it was prohibitedto require import licensesamong the Andean Common Market, the Government declared itself the sole importer and then delegatedthis right to the private sector as it would an import license. [1s) 11 percent of all tariff itemswere prohibitedfrom importand 29 percent required licensesor delegations (see Table 2.5A).
2.24 Depending on the item, import permits were granted by the DevelopmentMinistry (for most items), the Finance Ministry, or the Agriculture Ministry. Importers were required to apply separately for each import order, and the Development Ministry received 71,000 applicationsduring 1985, of which 48,000 were denied and 23,000 approved. There were no written criteria, but authorities soughtgenerally to protect domesticindustries, encourageemployment and increasecapacity utilization, ensure the production of "priority" goods and "necessities,"and to prevent importationof "luxuries."
2.25 Importers often had to give the DevelopmentMinistry a 'letter of no objection"from the producers' associationstating that the domestic industrywas unable to produce the items in the quantity which would be imported. The importlicenses the DevelopmentMinistry issued generallyexceeded the foreign exchange budget the Finance Ministry administered so that, effectively, both ministries administeredindustrial policy. The system of importpermits was also used to establish state enterprises in steel, aluminum, and petrochemicalsas de facto import monopolies. For example, only the state- owned steel company, SIDOR, could importsteel regardlessof whether it produced competingitems.
2.26 Protection of manufacturing from imports by licenses varied greatly among stages of processingand-within manufacturing-by subsectors. Table 2.5A shows that import licenses were used most heavily for processed foods, consumer goods, transport equipment, and finished industrialgoods. They were applied least to semi-processedinputs and capital equipment. Table 2.6A shows the wide variation in applicationof NTBs amongsubsectors. For agro-industry,only nine percent of importitems were freely importable while for chemicals, petroleum and coal, 77 percent could be imported without restrictionby non-tariff barriers.
2.27 The measure of protectionprovided by importrestrictions is not so much in the number or percentageof items which are protected as it is in the value of domesticproduction which is protected. If non-tariffbarriers are appliedonly against importedgoods where there is no domesticproduction (e.g., to prohibit "luxury" imports), it has far different economic implicationsthan if they are applied only against goods which compete against domesticproducers. Since the NTBs in Venezuelahave been used for protection, we would expect to find them applied most heavily in items where there is domestic production and least heavily where there is not.
2.28 To approximatethe domesticproduction covered by NTBs, an index was developedby weighting 1987 production levels (at the four-digit ISIC level) by the percentage of tariff items, under each classification,produced in each sector. These numbers, aggregatedto the two-digitISIC level, are shown in Table 2.7A. They yield an index which shows that before the 1989 reforms, 17 percent of domesticmanufacturing was protectedby importprohibitions, 33 percentby licenses, six percent required a health permit,3 and 43 percentwas free of NTBs. Combiningthis index with the unweightedincidence of import restrictions (Table 2.6A), we see that the ten percent of tariff items which were prohibited representedan imputed 17 percent of domesticproduction, the 29 percent which required a licensewere 36 percent of domesticproduction, and the three percent requiring a health permit were
sThere are instances where health permits have been used with the same restrictive effects as licenses or prohibitions, howeverit is unknownhow widely this may have occurred in Venezuela. [ 161
Table 2.5A: Import Restrictions and Average Tariffs by Sector and Stage of Processing, 1989.
LICENSEREQUIREMENTS AVERAGETARIFFS Import All items Proh. Hlth, F Items Pro Lic. Hlth. F
Entire Economy 6145 11% 29% 5% 55% 37% 57% 46% 41% 27%
Agriculture 299 20% 38% 36% 5% 36% 30% 40% 39% 13% Mining 97 5 11 - 84 14 10 26 - 12 Manufacturing 5749 10 29 3 57 37 60 46 43 28
Raw Mat'ls, Live Anim, Agri Prod 349 13% 26% 35% 26% 29% 27% 33% 39% 11% IntermediateSemi-Processed Inputs 1797 0 15 2 82 22 25 29 36 20 ProcessedFood and AgriculturalProd. 471 20 48 17 15 46 46 51 47 31 ProcessedFood with Additives 196 44 47 2 7 72 78 67 35 78 Pharmaceutical Inputs 68 - 16 53 31 35 - 46 44 14 Other IntermediateInputs 1052 6 43 - 51 42 53 45 30 39 Capital Equipment & Assemblies 1026 5 23 - 73 27 49 37 - 23 Transport Equipment 215 7 49 - 44 43 69 50 - 31 Finished Goods: Industry 374 13 39 1 47 51 55 55 35 47 Finished Goods: Consumer 597 43 31 - 26 61 60 65 - 58
Table 2.5B: Imnort Restrictions and Average Tariffs by Sector and Stage of Processing, 1990.
LICENSEREQUIREMENTS AVERAGETARIFFS Import All Items Proh. Lic Hith. Free Items Proh. Lic. Hlth. Free
Entire Economy 6903 5% 5% 8% 82% 19% 40% 27% 18% 17%
Agriculture 330 24% 32% 39% 6% 22% 30% 21% 19% 9% Mining 109 - - 1 99 6 - - 10 6 Manufacturing 6464 4 4 7 85 19 42 30 18 18
ConsumerGoods 2215 12% 8% 9% 71% 33% 43% 35% 28% 32% IntermediateGoods 2699 1 2 8 89 12 30 11 8 12 Capital Goods 1548 0 - 2 98 12 50 - 19 12
Note: Averagetarffs in 1989reflected only ad valoremtariffs. 651 items also attractedspecific tariffs. Sources: LEGIS, Arancelde Aduanasde VenezuelaNo. 95 (1989); GacetaOficial de la Regublicade Venezuela,#4176, March 30, 1990. (17 1
Table 2.6A: Import Restrictions and Average Tariffs by Manufacturing Subsector, 1989.
LICENSEREQUIREMENTS AVERAGETARIFFS Import AR Subsector Items Proh. Lic. Hlth. Free Items Proh. Lic. Hith. Free
All Manufacturing 5749 10% 29% 3% 57% 37% 60% 46% 43% 28%
31 Food, Beverages,Tobacco 550 30% 49% 12% 9% 58% 65% 58% 44% 58% 32 Textiles, Leather 584 30 36 5 30 53 60 53 69 46 33 Wood, Cork Products 88 10 34 14 41 75 82 98 51 62 34 Paper, Printing 172 6 20 - 74 45 49 62 - 40 35 Chemicals, Petroleum, Coal 1814 2 17 4 77 22 57 31 35 19 36 NonmetallicMinerals 183 15 30 - 55 53 53 60 - 50 37 Basic Metal Industry 331 0 36 - 64 22 45 17 - 24 38 Metal Products, Machinery 1796 7 33 - 60 37 56 47 - 29 39 Other Manufacturing 199 34 26 - 41 54 53 51 - 56
Table 2.6B: Import Restrictions and Average Tariffs by Manufacturing Subsector, 1990.
LICENSEREQUIREMENTS AVERAGETARIFFS Import All Subsector Items Proh. Lic. Hlth. Free Items Proh. Lic. Hlth. Free
AUManufacturing 6464 4% 4% 7% 85% 19% 42% 30% 18% 18%
31 Food, Beverages,Tobacco 608 25% 25% 25% 26% 35% 40% 32% 32% 35% 32 Textiles, Leather 973 10 0 2 88 36 48 10 10 35 33 Wood, Cork Product 98 21 - 16 63 37 44 - 28 38 34 Paper, Printing 188 - - - 100 18 - - - 18 35 Chemicals,Petroleum, Coal 1734 0 7 14 79 9 50 4 10 9 36 Nonmetallic Minerals 168 2 - - 98 24 45 - - 24 37 Basic Metal Industry 390 - - 4 96 7 - - 4 7 38 Metal Products, Machinery 2073 1 - 1 98 15 29 - 20 15 39 Other Manufacturing 223 17 - 3 80 27 47 - 35 24
Sources: LEGIS, Arancelde Aluanas de VenezuelaNo. 95 (1989); GacetaOficial de la Revublicade V'nezuela, #4176, March30, 1990. [18 1
Table 2.7A: Production Coverage of NTB's by Manufacturing Subsector, 1989.
1987 PRODUCTIONCOVERAGE PERCENTOF SUBSECTOR Production (Bilion bolivares) PRODUCTIONCOVERED Subsector (BillionBs.1 Proh. Lie, HIlt Fee Pmh, LiL l F
All Manufacturing 357.5 61.9 120.2 20.6 154.9 17% 33% 6% 43%
31 Food, Beverages,Tobacco 84.0 30.5 29.9 16.8 6.8 36% 36% 20% 8% 32 Textiles, Leather 33.7 13.2 12.9 .3 7.3 39 38 1 22 33 Wood, Cork Produec 6.4 3.6 1.9 .7 .2 56 30 11 3 34 Paper, Printing 18.8 4.8 - 12.5 - 8 26 - 66 35 Chemicals, Petroleum, Coal 95.9 5.9 26.0 2.6 61.3 6 27 3 64 36 Nomnetallic Minerals 13.4 1.6 4.8 - 7.1 12 36 - 53 37 Basic Metal industry 41.7 .2 15.0 - 26.5 0 36 - 64 38 Metal Products, Machinery 61.3 4.5 24.5 .0 32.3 7 40 - 53 39 Other Manufacturing 2.4 .9 .4 .1 .9 38 17 4 38
Table 2.7B: Production Coverage of NTB's by Manufacturing Subsector, 1990.
1987 PRODUCTIONCOVERAGE PERCENTOF SUBSECTOR Production (Billionbolivares) PRODUCTIONCOVERED Subsector (BillionBs.) Proh Lie. Hlth Free Proh Lie. Hlth. Fre
AHManufacturing 357.5 26.6 27.7 38.2 265.1 7% 8% 11% 74%
31 Food, Beverages,Tobacco 84.0 20.9 20.7 20.7 21.7 25% 25% 25% 26% 32 Textiles, Leather 33.7 3.3 0.0 .7 29.7 10 - 2 88 33 Wood, Cork Products 6.4 1.3 - 1.0 4.0 20 - 16 63 34 Paper, Printing 18.8 - - - 18.8 - - - 100 35 Chemicals,Petroleum, Coal 95.9 - 6.9 13.0 75.9 - 7 14 79 36 Nonmetallic Minerals 13.4 .2 - - 13.2 1 - - 99 37 Basic Metal Industry 41.7 - - 1.8 39.9 - - 4 96 38 Metal Products, Machinery 61.3 .4 - .9 60.0 1 - 1 98 39 Other Manufacturing 2.4 .4 - .1 1.9 17 - 4 79
Note: Imputedproduction coverage figures were calculatedat the 4-digit ISIC level and aggregated. Souces: LEGIS, Amncelde Aduanasdo VenezuelaNo. 95 (19891; GacetaOficial de la Republicade Venezuela,#4176, March30, 1990. [ 19 1 six percent of production. The 57 percent of tariff items which were free of NTB's correspondedto 43 percent of domesticproduction. The subsector in which this effect was most dramatic was ISIC 33, wood and cork products, where ten percent of the import items were prohibited, but they represented 56 percent of the production.
2.1.1.3 Tariffs
2.29 Before the trade reforms of 1989, there were 41 tariff rates with a maximum of 135 percent. Tariffs had been establishedover the years on a case-by-casebasis without guidelinesfor settingthe rates. The dispersionwas great: About a sixth of the items attractedtariffs below one percent and a fifth had tariffs over 80 percent. In additionto ad valoremtariffs, 854 items also attractedspecific duties so that effective rates were as high as 940 percent. Average tariff rates by sector and stage of processinghad the cascadingpattern (high for final goods, low for inputs and capital goods) typical of import substitution(Table 2.5A). Tariff rates were higher for items restricted by NTB's than for those freely importable. There were also large differences in average tariffs among the manufacturing subsectors (Table 2.6A).
2.30 Protection was provided by licenses and exchangeallocations since tariffs, while high, were routinely reduced. In 1984-85, importers on average paid only 28 percent of the statutory tariff rates after 72 percent was exonerated. An importer could apply to the Developmentor Agricultural Ministry for an exonerationwhich, upon ministerialrecommendation, would be granted by the Finance Ministry. Exonerationswere generally given where there was no domesticproduction of an item. The DevelopmentMinistry processed over 7,000 applications-eachwith supportingdocumentation up to one- half inch thick-annually and determined favorably in about 80 percent of the cases.
2.31 Once it was determinedthat an importer could receive an exoneration, further discretion was applied in assigninga tariff rate. In 1985, tariffs after exoneration were set at 17 rates between 0 percent and 50 percent, though most rates (about 85 percent) were either 1 percent, 5 percent, or 10 percent. Rates varied not only among import items but also among importers. For example for organic synthetic coloring materials the tariff was 60 percent plus 13 Bs./K in 1985. There were 175 exonerations, 76 to 10 percent, 81 to 5 percent, and 18 to 1 percent. There were not always clear guidelinesfor determiningthe rate, althoughat one time the DevelopmentMinistry was applying higher rates to commercialimporters than to direct importers on the theory that the commercialimporter was making a profit from his customers but the direct importer was reducing the costs of his inputs. This may have increased the costs of imported inputs for those who bought materials through commercial distributors-essentiallysmaller businesseswho could not importdirectly in large lots.
2.32 Actual tariff collectionsaveraged about 10 percentof importvalues (andabout 1.2 percent of GDP) in 1984-85. Exonerationswere about two-and-a-halftimes as great as tariff receipts. In 1984 exonerationswere 12.2 billion bolivares and in 1985they were 14.5 billion-respectively2.9 percent and 3.2 percent of GDP. Tariffs represent about four to five percent of governmentreceipts. The effect of the exonerations is to reduce Governmentrevenues, but the exonerations were not coordinatedwith overall fiscal policy. [201
Figure 2.1: Price and Output Under OMdal and Free Market ExchangeRates.
S
PoX I F
0
D
qI1 q3q3 22 QFF Q0
2.1.1.4 Import Restrictions: CombinedEffects
2.33 It is impossibleto determine, strictly from theory, the combinedeffects of the exchange allocations, import licenses, and tariff regime. The analysis is complicatedfurther by the interactionof these instrumentswith the price controls which also affected productive incentives and the pattern of distribution. While we can estimate the order of magnitude of the benefits of preferential foreign exchange(Table 2.4) and of tariff exonerations,we cannot predict from theory alone how these benefits were divided among importers, producers, and consumers. The difficultiesof analyzingthe systemare illustratedby a series of successivelymore complicatedmodels of output, price, and consumption.
2.34 Case 1. Figure 2.1 is a simple economicmodel of price and output for a consumption good underthe preferentital(official) and thefree marketexchange rates. In this diagram, D represents the domestic demand and S the quantity which would be supplied by the domestic industry. (It is assumed here that imported inputs enter only at the free market rate. This assumption is relaxed in Case 4.) Assumingthat Venezuelais a small enoughbuyer of the item that its demand does not influence world prices, then at the official exchangerate, Venezuelacan import unlimitedquantities at a domestic price POwhich is determinedby the border price, tariffs, and the official exchangerate. At that price, QOwill be demandedand the domesticindustry will supply q, units and QO- q1 units would be imported. If the item could be importedonly at the free market rate, then the domesticprice would be higher, P., demand would decrease to QF,with the domestic industry supplyingq2 units and imports supplyingthe remaining QF- q 2 . The effect of the preferential exchangerate is to increase consumptionby Qo- QF [21 1 units, to reduce domesticproduction by qc,- q1, and to increase importsby the sum of the changes, (QO-
QF) + (q2 - ql). 2.35 It should be noted here (and below) that tariffs and tariff exonerationsfunction within a market the same as preferentialforeign exchange. A tariff selectivelyincreases the exchangerate for the good in question, and an exonerationis analogousto receivinga preferentialexchange rate. The effects on output, prices, and distributionwill be the same as those deduced from looking at preferentialand free market exchangerates. Tariffs and exonerations,taken in combinationwith the preferential and official rates, determine the vertical distance between PFand POin Figures 2.1 and 2.2.
2.36 Case 2. Considerthe case wherepreferentialforeign exchange is ratoned and there is not enoughto importat the preferentialrate the QO- q, units that are demanded. If the foreign exchange allocationpermits importationof lessthan QF- q2, then the domesticsupply will be insufficientto satisfy demand at any price below PF. Some items will be imported at the parallel rate, and the market price will be PF (If the exchangebudget permits importsof an intermediatequantity between QO- q, and QF - q2, then no units will be importedat the free rate and the market price will be determinedby the domestic supply curve and will be greater than PObut less than PF.) Those who receive the preferentialexchange will import at POand enjoy profits equal to PF- PO, the difference between their import price and the market price. If price controls are used to hold prices below PFto reduce importers' profits and pass the benefits of the preferential foreign exchangeon to consumers, then imports would not take place at the free market rate, domestic supply would not expand, and there would be shortages. Where foreign exchange is rationed and insufficientitems are importedto satisfy the market at she preferential price, then market forces will drive up the price of all units. In Venezuela, there were few items for which preferential exchange was automaticallygranted. Only raw materials, transportation equipment, and construction equipment had 95 percent or more of their imports enter at the official rate in 1986 (Table 2.3).
2.37 Ca-se . If there were unlimitedpreferentialforeign exchange forthe consumptiongood and its inputs, then domesticproduction costs would be reduced and the domestic supply curve would shift to the right, to S', as domesticproducers would supply a greater quantityat each price. The price of the commoditywould remainat PO--determinedby the world price and the exchangerate-and demand would be unchanged at QO. Domestic output would rise from qc to q%. Whether the domestic output would be as great as it would in the case where the free market exchangerate led to the higher domestic price, PF, is an empiricalquestion which would be determinedby the import contentof the item and the relative cost advantagewhich Venezuelawould have in the other factors of production. This arrangement expands domestic output to a more efficient level, correcting a distortion in Case 1 where the output entered at a preferencialrate while the inputs entered at the free rate.
2.38 Case4. Where preferentialexchange is availablewithout limit for impoltedinputs but rationedfor the consumptiongood, the domestic market price would rise, as in Case 2, to a level between PFand PO,depending upon how much preferentialexchange were granted. Domestic output would expand beyond q3 and domestic suppliers-as well as the importers who were awarded the preferentialforeign exchange-would realize greater profits at the higher prices.
2.39 C . In the previous cases we ignored importlicenses. Cases 14 are accurate models where licenses either are not required or they are given in sufficient number as not to be a binding constraint. If we revise Case 1 to assumethat irnpoitlicenses are bindingand preferentialforeign 1 22 1 exchange is availablefor the consumptiongood, then the domesticmarket price is no longer determined by the world price. In Figure 2.2, imports are restricted to the quantity Q,, less than the Qp - q2
Figure 2.2: Price and Output with Import Quotas.
P
SI
PI
F -
D
(Figure 2.1) which would be required to supply the internalmarket at the price P.. As a result the pric4 in Venezuela,Pv, would no longer be related to the world price (PF at the free market rate or POat the official rate). If there were no domesticproduction of the good, the price, P,, would be determinedby the domestic demand and the quantityof imports. With domesticproduction, the supply curve would originate from 0, jump from point a to point b at the price determinedby the official rate, PO and then continue along S. Price would be determined by the intersection of the domestic supply and demand curves, S and D. Domestic consumptionwould be Q consisting of Q, imported units and Q - Q, domesticallyproduced units. In this case, those who receivedthe importlicenses would profit, regardless of whether they importedat the official or the free marketrate since the Venezuelanprice is greater than both P. and PO. However, the effect of granting prefezentialforeign exchange, lower tariffs, or tariff exonerationswhere itemsare constrainedby importlicenses would be to give profits to importersof Pv - PO on each unit imported. In Tables 2.5A and 2.6A average tariffs are shown for licensed and free items and, in general, where licenses are required the tariffs are higher (except processed foods with additives[Table 2.5AJ and other manufacturing[Table 2.6A]). However, this does not show the effects of exonerations. If price controls were used in attempt to pass the exchangebenefits on to consumers, then, as in the previous cases, they would reduce domesticproduction and lead to shortages. l 23 1
2.40 While we have not analyzeddata on importlicense applications and decisionsto determine which imports were constrainedby licenses and which by reduced domestic demand, it is interestingto look at Table 2.2. The last two columns of Table 2.2 show average imports as a percentage of base levels and average exchange indices--a measure of which classes of items entered relatively more frequentlyat the free rate. Where items are constrainedby licenses, they should enter the country at a
Figure 2.3: Price and Output with Import Quotas On Outputs and Inputs.
., .~~S s'
P'v
PoV
0 p~~Q Q
- ~ ~~ ___.___,_ D
Q Q
higher average exchangerate to avoid giving profits to the importers. Thus, other things being equal, small numbers (belowthe 68 percent average) in the penultimatecolumn should be associatedwith large numbers (over 100) in the last column, as is the case with alcoholicbeverages or don-durableconsumer luxuries. A low level of imports with a low exchangeindex (e. g., food products, assembledautos and cargo vehicles)would indicatethat the importers wouldbe makingprofits from the preferentialexchange (unless it were taxed away by tariffs or passed on to consumers through price controls). For most categories this conditionholds.
2.41 Case 6. Vlhere finished goodsare constrainedby licensesand preferentialforeign exchangeis availablefor inputs,then the domesticsupply curve in Figure2.2 shiftsfrom S to S'. This lowers the domesticprice from Pv to Pv'. Consumptionand domesticoutput increase from Q to Q*'. Assumingthere is no smuggling,the domesticprice remains above PF, the price at which the good could be importedat the free market rate if it were not constrainedby licenses. Price controls would, as in the [24 1 other cases, be counterproductive,and the additional output, Q' - Q', would be inefficientin the sense that the cost of the domesticproduction is greater than the cost of importingthe same number of items when inputs and outputs are valued at the free market rate. Nonetheless, it could, by reducing the domesticprice, redistributethe benefits of the import licenses away from importers toward consumers.
2.42 Case 7. If finished gocds and inputs are constrainedby licenses,then the domestic supply curve has a kink as shown in Figure 2.3. This often occurred in Venezuela,as when plants were forced to shut down for lack of imported inputs. Because of the constraint on inputs, domestic supply cannot expand beyond Q - Q,, and the domesticmarket-clearing price would rise from Pv to Pv'. At any price below Pv' there would be shortages. However, the cost of production would be only Pv", so that producers would earn excess profits of Pv' - Pv'. Price controls to redistribute the profits to consumerswould create shortages if prices were set below Pv'. Any concessionssuch as preferential exchangeor tariff exonerationseither to the importers of the inputs or the final goods would also create excess profits for the importers.
2.43 Case S. Throughoutthe first seven cases we have assumedthere is an upward-sloping supply curve: that as prices rise more product would be supplied. While the first seven cases are accurate modelsof some products and some industrieswhere there is competitionamong domestic firms, if an industryis a monopolyor an effectivecartel, then producerswill attempt to set their output levels so that marginal cost equals not price but marginal revenue. At higher prices there could be lower output. This may be a more accurate model of Venezuelan industry during the 1980s since many industrialpolicies were administeredto encouragecollusion among competitorsand to promote cartels:
• The reliance on import licenses and prohibitionsas the principal instrumentof industrialprotection exemptedan estimated50 percentof domesticmanufacturing from internationalcompetition. In some sectors, the percentage was much higher (Table 2.7A): 72 percent in agro-industry, 78 percent in textiles, 86 percent in wood and cork products. In some items, state enterprises were allowed to control imports of related products.
* RECADI asked firms to submit requests for foreign exchange budgets through their trade associations. Budgets were generally based on historic import levels, and prevented firms from competingaggressively for market share.
* The DevelopmentMinistry relied on producers' associationsto issue a "letter of no objection"before giving an import license.
* Import licenses and exonerationswere awarded only where the DevelopmentMinistry judged that demand for an item was beyond domestic "capacity." But capacity is not fixed: the essence of an upward-slopingsupply curve is that as prices rise-even in the short run-output can be expandedwith existingcapacity. The linkagebetween price and output was missing from these calculationsso that the DevelopmentMinistry abetted the domesticproducers in setting their own prices.
* The price controls--establishedat levels which would maintain the profitabilityof the least efficient firm in an industry-assisted other producersin fixing prices above their costs of production.
2.44 In these cases, the outcomes would not depend so much on the instrumentswhich were appliedbut upon a bargainingor a politicalprocess. An astute, skilled,and well-informedDevelopment M;nistry, working closely with RECADI might well have been able to manipulateeconomic incentives f 25] to foster efficient production and to achieve distributiveobjectives. However, there are many ways in which industrialistscould have taken advantageof the fragmenteddecision-making, manipulation of data, and opportunitiesfor corruption to receive excess profits.
2.45 Assessment. We have seen seven well-articulatedcases and, finally, some complications which demonstratethat under reasonableassumptions it is impossibleto predict the outcome--interms of prices, output, and distribution--ofthe interactionsamong trade policy instruments. There were over 6000 items in, Venezuela's tariff code, and it would be possible to assign each item to one of the foregoing cases. Most likely, most of the importantitems would fall into either cases 6, 7, or 8 where the effects would be an empirical rather than a theoretical determination. In such cases, it would be nearly impossiblefor Governmentofficials to determineor to control the level of protection or the rate of profits. There would be no incentivefor entrepreneursto invest in plant and equipmentgiven that it would be impossibleto predictthe returnsto investmentand that resourceswould be better spent in trying to influence Ministerial decisions of the allocation of import licenses or foreign exchange allocations. Similarly, if an entrepreneur were to invest to reduce costs, then he could expect to see cost savings passed to the consumer through price controls. While the system was well-intended, it was so complicatedit is impossiblefor economistsor governmentofficials to tell what was going on just from theory or whether it achieved its stated purposes. What is shown unambiguouslyin Chapter 3 is that it was associatedwith reduced productivity and a general decline in output and employment. It was a system demandingdifficult, time-consuming,inter-ministerial coordination and which would have been beyond the capacity of most governmentsto administereffectively and efficiently.
2.1.1.5 Reform of the Import Regime
2.46 The Governmenthas begun a phased reform of the import regime. The most important single measure was the unificationand floatingof the exchangerate. The reform of import licenses and tariffs is contrastedwith the earlier trade regime in Tables 2.5-2.8. Import prohibitionsand licenses have been sharply reduced and today protect less than 15 percent of domesticproduction (Fable 2.7B). The medium-termgoal is to reduce this to five percent. The greatest incidenceof prohibitionsand licenses remains in agro-industry,but these may be relaxed as the agriculturaltrade reform begins. The tariff code has been restructured for the manufacturingsector with the intention of affording each line of productionroughly equal levels of effective protection. The averagetariff rate has alreadybeen reduced from 37 to 19 percent (Table2.5), with consumergoods-at 33 percent-continuingto attract the highest average rate. The maximumtariff is 50 percent and the Government'sgoal is to place all tariffs within the range of 10 to 20 percent by 1993.
2.1.2 E;xportIncentives
2.47 To offset the strong anti-exportbias inherent in the import regime and the overvalued exchangerate, the Governmentoffered three significantexport incentives: the bono de exportaci6n,a subsidy to non-traditionalexporters, paid as a percentage of their export receipts; a currency retention scheme; and subsidized credit for exporters through FINEXPO. The bulk of export subsidies (e. g., 60 percent of the bonosde exportacidn)went to state-owned enterprises-which generate most of the nontraditionalexports (65 percent of exports qualifyingfor the bonosde exportaci6n).
0 Export subsidy. About 80 percent of non-traditionalexports qualify for the export subsidy (bonode exportaci6n),a negotiablebond applicabletoward any federal tax. The subsidy is paid to the exporter as a percentage of the f. o. b. value of exports, and the value of the bond is exempt from taxation. [ 25 1 to foster efficient production and to achieve distributiveobjectives. However, there are many ways in which industrialistscould have taken advantageof the fragmenteddecision-making, manipulation of data, and opportunitiesfor corruptionto receive excessprofits.
2.45 Assessment. We have seen seven well-articulatedcases and, finally, some complications which demonstratethat under reasonableassumptions it is impossibleto predict the outcome--interms of prices, output, and distribution--ofthe interactionsamong trade policy instruments. There were over 6000 items in Venezuela's tariff code, and it would be possible to assign each item to one of the foregoingcases. Most likely, most of the important items would fall into either cases 6, 7, or 8 where the effects would be an empirical rather than a theoretical determination. In such cases, it would be nearly impossiblefor Governmentofficials to determine or to control the level of protection or the rate of profits. There would be no incentivefor entrepreneursto invest in plant and equipmentgiven that it wouldbe impossibleto predict the returns to investmentand that resourceswould be better spent in trying to influence Ministerial decisions of the allocationof import licenses or foreign exchange allocations. Similarly, if an entrepreneur were to invest to reduce costs, then he could expect to see cost savings passed to the consumer through price controls. While the system was well-intended, it was so complicatedit is impossiblefor economistsor goverrinent officials to tell what was going on just from theory or whether it achieved its stated purposes. What is shown unambiguouslyin Chapter 3 is that it was associated with reduced productivity and a general decline in output and employment. It was a system demandingdifficult, time-consuming,inter-ministerial coordination and which would have been beyond the capacity of most governmentsto administereffectively and efficiently.
2.1.1.5 Reform of the Import Regime
2.46 The Governmenthas begun a phased reform of the importregime. The most important single measure was the unificationand floatingof the exchangerate. The reform of import licenses and tariffs is contrastedwith the earlier trade regime in Tables 2.5-2.8. Import prohibitionsand licenseshave been sharply reduced and today protect less than 15 percent of domesticproduction (Table 2.7B). The medium-termgoal is to reduce this to five percent. The greatest incidenceof prohibitionsand licenses remains in agro-industry, but these may be relaxed as the agriculturaltrade reform begins. The tariff code has been restructured for the manufacturingsector with the intention of affording each line of productionroughly equal levels of effective protection. The averagetariff rate has alreadybeen reduced from 37 to 19 percent (Table 2.5), with consumergoods-at 33 percent-continuingto attract the highest average rate. The maximumtariff is 50 perce'it and the Government'sgoal is to place all tariffs within the range of 10 to 20 percent by 1993.
2.1.2 Export Incentives
2.47 To offset the strong anti-exportbias inherent in the import regime and the overvalued exchangerate, the Governmentoffered three significantexport incentives: the bonode exportaci6n,a subsidy to non-traditionalexporters, paid as a percentage of their export receipts; a currency retention scheme; and subsidizedcredit for exporters through FINEXPO. The bulk of export subsidies (e. g., 60 percent of the bonosde exportaci6n)went to state-ownedenterprises-which generate most of the nontraditionalexports (65 percent of exports qualifyingfor the bonosde exportacion).
* Export subsidy. About 80 percent of non-traditionalexports qualify for the export subsidy (bonode exportacion),a negotiablebond applicabletoward any federal tax. The subsidyis paid to the exporter as a percentage of the f. o. b. value of exports, and the value of the bond is exempt from taxation. [ 27 1 of subsidy would have been less than .01 percent of GDP. Reform of these credit subsidieswill be included within the Government's overall financial sector program.
2.48 A temporaryadmissions scheme has existedfor severalyears under which exporterscould import inputs duty-free, but few exporterstook advantageof it becauseof the delays and paperworkand because using it precludedexporters from receivingthe higher benefits of the bono de exportaci6n. This scheme was improved in February, 1990, and it is widely used. There is no duty-drawbackscheme, but the Government is working with consultantsto design one.
2.49 Assessment. The export subsidiesintroduced new economicdistortions, encouraginglow value-addedexports over high value-added, encouragingexports which were inefficient and should not have taken place. The incentiveregime was changed frequentlyand without notice, and exporters were reluctantto rely on them. Under these conditionsthey did not stimulateextra, efficient exports, but gave windfall gains to exports which would have taken place anyway. Subsidiesto state-owned enterprises were merely ways of transferring resources from one governmentpocket to another. In the case of VIASA, the subsidies one year were greater than the net profits, giving an inaccurate picture of the airline's efficiency. Nogues (1989) found that, aside from Brazil, Latin American experiences with export subsidieswere disappointing. They did not achieve their objectivesof increasingor diversifying exports on a sustainedbasis and they fostered widespreadcorruption.
2.50 Many people point to the large, apparentincrease in exports in 1989 as justificationfor continuingthe export subsidy. Whilenontraditional exports reported by OCEI increased50% from $1.87 billion in 1988 to $2.79 billion in 1989, nearly half of the apparent increase was a result of the change in trade regime from one which encouragedunder-invoicing to one which rewarded over-invoicing(see Box 2). That is, either 1988 exports were higher than $1.87 or 1989 exports were lower than $2.79 billion, or some combinationof the two. Further, the decrease in Venezuelan consumption,the high costs of carrying inventories,and the free market exchangerate all contributedto increasedexports. The role of exports and export subsidies in the reform program is discussed in Section 4.1.6.
2.2 Public Enterprises
2.51 Aside from trade policy, the largest governmentintervention in the industrialsector was direct ownership. This section describesthe magnitudeof state ownershipof productiveactivity and its effects on the private sector. Section 2.2.1 describes the distribution of the state owned industrial enterprises and section 2.2.2 refers to the policy instrumentsinfluencing industrial firms' economic decisions. Section 2.2.3 describes SOEs' market practices, and their impact on private industry is described in section 2.2.4. Recent policy changes are described in section 2.2.5. Policy recommendationsare offered in section 2.2.6.
2.52 State-ownedenterprises are concentratedin resource-based,export-oriented activities and in services. In many cases, they are the only domestic producer and, before the reforms in 1989, they controlled imports of competingproducts. Their business practices vis-a-vis the private sector reflect their monopolisticposition and result in transfers from private to public firms. The new economic environment is likely to improve quality and service. The main recommendationis to pursue the Government'smedium-term program of privatizationand other measuresto increaseprivate participation and competition and to ensure that all SOEs, while remaining publicly owned, are exposed to full competitionand market forces. [ 28 1
Box 2: A BOOM IN NONTRADITiONALEXPORTS? Between 1988 and 1989, non-petroleumexports increased by 49% from $1.87 to $2.79 billion. The number of tariff items exported reached 2172--a 40% increase from 1988, and the number of exporters tripled. About 40% of the exports were from the private sector, up from 37% in 1988.
The ForeignTrade Institute (Institutode ComercioExterior, 1990) attributes the increase to seven factors: Simplificationof the importtariff structureto reduce the anti-exportbias; Eliminationof export prohibitions and red tape; Availabilityof trade information related to markets, products, prices, import rules and regulation of the country of destiny; Establishmentof temporary admission program for raw and semi- processedmaterials; Infrastructureimprovements in the industrialfree zones; Special export finance and credit programs; Export insuranceprograms; New legal frameworkpromoting foreign investment.
While these programs (some of which were pre-existingand others of which were implementedtoo late to have had any effect on 1989 exports) will help in the long run to make exporting more profitable, other factors were importantin explaining 1989 exports:
Exchange rate. In 1988, exporterswere paid the officialexchange rate of 14.5 Bs./US$ plus a tax-exempt export subsidy of up to 48%. In 1989, exporters receivedthe free market rate of 36 to 44 Bs./US$ plus an export subsidy of 30%. While higher inflationduring 1989-at a cumulativerate of 81% for the year- eroded the value of these incentives,incentives for exporting had increased substantially.
Under-invoicing vs. over-invoicing. In 1988, exporters had an incentiveto under-invoicebecause they were required to exchangetheir dollars at the official rate. The export subsidy partially offset this implicit tax, but with the parallel rate in the 30's while the official rate was 14.5 the subsidy was no more than 48%, so the net incentive was to under-invoiceto keep dollars outside the country or to convert them at the parallel rate. Further, exports of many products were illegal and widespreadsmuggling was reported. Consequently,1988 exports were probably larger than indicated by 'fficial statistics.
In 1989,exporters had an incentiveto over-invoicebecause they receivedthe free-marketexchange rate plus a 30% export subsidy. For every dollar of export receipts, the Governmentpaid an additionalthirty cents, so exporters would benefit by having foreign buyers show higher prices for items than were actually paid. Consequently,in 1989, the exports were probably smaller than were indicatedby official statistics.
Venezuelanexports are reported in dollars and in kilograms. The unit value of exports can be estimated by dividingdollars by weight. There are many reasons why the unit value would not remain constantfrom year to year-particularly since most export items are not sold by weight-however, we would also expect that the switch in incentivesfrom under- to over-invoicingwould be reflected in higher unit values.
The top 100 export items in 1989 accountedfor approximatelythree fourths of non-petroleumexports. Nine of the items were not exported in 1988, so it is impossibleto compare their unit values. Of the other 91, the unit values of 74 increased (an average of 218%) and 17 declined (an average of 15%). Between 1988and 1989,the unit value of 25 of the 91 items more than doubled. (By comparison, for the same 100 commoditiesbetween 1987and 1988, 12 were not exported in both years and, of the remaining88, 54 unit values increasedan average of 38% and 34 declinedan average of 17%.) [29
Box 2: A BOOM IN NONTRADITIONALEXPORTS? (continwud)
Table 2.8: Export Commodities with Greatest Changes in Unit Values, 1988-89.
1988 1989 Percentage Increase in: Exports Exports Export Export Unit Tariff item: ($US. M) ($US. M) Value Volume Value
Postal and greeting cards $ .20 $10.8 5,430% 12% 4820% Air conditioning motors (36. ;. 000 BTU's) .004 14.1 378,290 12880 2820 Disposable razors .06 28.6 46,040 4325 940 Polymer and copolymer plates and leaves 1.01 26.1 2,480 187 800 Animal products (not for consumption) .42 4.2 900 34 650 Disinfectants .14 5.8 4,200 526 590 Mollusks .71 14.0 1,870 294 400 Air conditioning motors-parts and pieces .001 13.6 595,440 134412 340 Perfume products 1.23 21.1 1,620 308 320 Shoes 2.43 19.2 690 90 320
Source: World Bank staff calculations, based on data from ICE.
Table 2.8 shows the ten export items with the largest increase in unit values between 1988 and 1989. While some items enjoyed increases in both unit values and volume of exports, most had larger increases in unit values than volumes. The Government has recognized the abuses which were induced by the export subsidy and is investigating reports of over-invoicing, empty containers, and round trips (exports into neighboring countries followed by re-importation of the same goods). Arrest warrants were issued against businessmen, airport customs agents, military personnel and bank employees.
The 1988 exports of the 91 items which were exported in both years were $1.69 billion and the 1989 exports were $2.29 billion, a 36% increase. If the 1989 export volumes had been made at the 1988 unit values, then they would have been $1.99 billion, an 18% increase. By this method of estimating, and unless there were changes in internationalprices for these items, then about half the apparentincrease in nontraditionalexports would be explained by the change in incentivesfrom a regime favoring under- invoicingto onefavoring over-invoicing.
Domestic recession. Between 1988 and 1989, consumption declined by 5%-increasing inventories, and interest rates rose from 8.5% to over 40%--increasing the costs of carrying inventories. Inventories had already been increased in 1987 and 1988 in anticipation of a devaluation, and in 1989 merchants reduced inventories substantially. Some found it profitable to export goods from inventories, including possible re- exports of merchandise which had been imported the year before at the official exchange rate of 14.5. The profitability of many of these exports depended on the export subsidy. Unless the variable cost of producing additional units is less than the world price, these will be one-time exports rather than the first in a series of profitable exports. 1 30] 2.2.1 Distributionof Ownership
2.53 The importanceof publicly-ownedindustries-and the rents accruingto the public sector from these activities-rose with world petroleumprices in 1973; with the nationalizationof foreign oil companiesin 1976; and since the mid-1970sw:th the growth of petrochemicals,steel, aluminum, and chemicalsproduction. Bourginon(1989, p. 300) estimatesthat 19 percent of the resources derived from the oil boom were directed to public investmentsin those areas.
2.54 Excludingpetroleum refining, SOEsaccounted for five and 18 percent of industrialvalue added in 1970 and 1986, respectively. When petroleum refining is includedthe correspondingfigures are four percent and 42 percent (see Table 2.9). Preliminary data for 1987 show public firms concentratedin nonferrous metals (largely aluminum), where the public sector accounts for 91 percent of domesticvalue added; iron and steel, where it accountsfor 62 percent; and chemicaland petrochemical products. SOEs (withoutprivate participation)also extract the basic material inputs for those industries: crude oil, iron ore, and bauxite.
2.55 The Government prohibited private investment in some subsectors. Following the nationalization of the foreign petroleum companies in 1976, petrochemicals were reserved for PEQUIVEN,the affiliateof Petr6leosde Venezuela,S. A. (PDVSA)the petroleumproducer and refiner. Recently, however, petrochemicalfirms have been establishedwith the participationof domesticprivate and foreign capital, with PEQUIVEN's share between 11 percent and 75 percent.
2.56 In the aluminum-relatedactivities, minority foreign participationis present in the alumina and primary aluminum firms. These are run by the goverrment-ownedCorporaci6n Venezolanade Guayana (CVG). Domestic private interests are present in the aluminummanufacturing activities only.
2.57 In the steel sector the Governmenthas a moilopolyin the production of flat steel at SIDOR, a CVG-managedfirm; it shares the productionof non-flat steels mostlywith the privately-owned SIVENSA;and there is domestic private investmentin the downstreamsteel industry.
2.58 Basic industries' output and their key material inputs are sold domestically and internationally. Of manufacturedexports in 1987-excludingpetroleum refining-aluminum accounted for 34 percent; steel, 21 percent; and chemicals, seven percent. As a proportion of 1987 production, exports accounted for 52 percent in aluminum, 43 percent in chemicals, and 17 percent in steel. In contrast, private industries like garments, shoes, food processing, and consumer durables are mostly oriented toward the domestic market. In 1987 the proportion of export to domestic production was one percent for nondurableconsumer goods (31-32).
2.59 Some service subsectorslike telecommunications,shipping and port handling, and postal services are dominated by SOEs. While not industrial SOEs, these activities are major obstacles to private sector developmentand trade expansion.
2.2.2 Policy Instruments
2.60 Resource allocation in industry has been influenced through direct controls, trade, financial and fiscal instruments. No estimates are available of the relative importance of different instrumentson private firms' economicdecisions; however, the use of commercialpolicy, and the role of the industrialSOEs in its implementation,appear to be critical. 1 311
Table 2.9: ManufacturingValue Addedby State and Privatelinus.
1970 1980 1986
State Private State Private State Private Firms Firms Total Firms Firms Total F.rms Firms Total
Total Manufacturing Mil. Bs 359 7,910 8,269 14,953 26,314 41,267 39,135 53,497 92,632 percent 4% 96% 36% 649. 42% 58%
Total Manufacturing (excl. Mil. Bs 332 5,948 6,280 2,204 26,314 28,518 11,622 53,497 65,119 Petroleum Refining) percent 5% 95% 8% 92% 18% 82%
Non-Durable Consumer Mil. Bs 20 3,245 3,265 47 13,593 13,640 258 28,713 28,971 Goods percent 1% 99% 100% 1% 99%
Intermediate Goods Mil. Bs 54 3,488 3,542 13,050 7,237 20,287 29,082 15,315 44,397 percent 2% 98% 64% 36% 66% 35%
IntermediateGoods (excl. Mil. Bs 27 1,519 1,546 301 7,223 7,524 1,569 15,315 16,884 Petroleum Refining) percent 2% 98% 4% 96% 9% 91%
Durable Consumer Mil. Bs 5 700 705 72 7,975 3,047 90 4,514 4,604 Goods percent 1% 99% 2% 97% 2% 98%
Capital Goods and Mil. Bs 280 477 757 1,784 2,509 4,293 9,705 4,955 14,660 Basic Metals percent 37% 63% 42% 58% 66% 34%
Sources: Central Bank of Venezaelaand CORDIPLAN.
2.61 In the past, after registrationat the DevelopmentMinistry, new investmentsand additions to capacity by private firms were eligible for "promoted project" status, discussed in Chapter 3. Rejection or failure to register did not legally prevent a project from taking place. However, the incentivesunder the preferentialstatus were significant, so that firms not receiving them were deterred from investing. The incentivesgranted included:imported inputs on favorableterms (access to import licenses, tariff exonerations,and foreign exchangeat the official exchangerate); import protection on output; credit at preferential interest rates; and incometax exonerations.
2.62 The SOEs were also entitledto foreign exchange and credit at preferentialrates and in some cases they are still granted importtariff exemptionsby law. They are normally the only producer in their subsector, and before the trade reforms in 1989 the DevelopmentMinistry implementedimport regimesthat were disadvantageousfor the private sector. Protectionthrough licenses was granted to most SOEs, and importers were asked to purchase at unfavorableterms selected itemsto obtain permissionto import other goods. Until recently, SIDOR's authorizationwas required to import all steel products; t 32 ] 2.63 In addition, Government linancial support to SOEs--both directly through budgetary transfers and indirectlythrough FIV loans and equityparticipation and governmentguaranteed borrowing- -allowed many SOEs to survive and expand in the absence of financial/market discipline. The Governmentand FIV channelroughly $1 billionannually in transfers to SOEs, much of it to service debt. Generally, such financial support has been provided without economic and financialjustification, clear objectives, or financial accountability.
2.2.3 Domestic Market Practices
2.64 The SOEs' market behavior is explained--amongother factors--by: a) institutional arrangements; b) marketposition as the only supplier in their subsector(through production and import controls); c) other economicpolkiies. Interviewswith private executivesfound several concerns about SOEs' practices. We did not determine how frequent or widespreadthe problems are, but they increase costs within Venezuelanindustry and reduce internationalcompetitiveness.
2.65 Delivery. Untimely delivery is a common complaint. VENALUM and (less so) ALCASAsell a significantpart of Lheiroutput under long-terminternational contracts, and only residually in the domesticmarket. The consensus among buyers is that the SOEs find the domestic market less profitableand this is reflected in their deliverypractices. In fact, in the past, ALCASA and VENALUM were required to sell primary aluminum at a discount domestically(with the output allocated among private firms based on installed capacity); and most private orders are not sufficiently large to be profitable. Althoughthe domestic price of primary aluminumhas been raised to about the fob export price, the domestic market is still less profitable than foreign markets because of the export subsidy (30 percent of fob export price in April 1990, but only 5 percent in September1990).
2.66 SIDOR's customers also expressed concerns about unreliable deliveries. Operationsat SIDOR are characterizedby: a) a large output mix (more than 17,000 products); b) highly centralized decisionmaking; and c) apparentlygranting deliverypriority to other SOEs, SIDOR'sjoint-ventures with the private sector (like Fior de Venezuela),and "preferred customers".
2.67 In contrast, PEQUIVEN's delivery practices are said to be acceptable. Hypothesesfor the different behavior between this firm and the CVG affiliates: a) PEQUIVEN is part of PDVSA, a better managedand world-integratedconglomerate; b) PEQUIVEN'sproduction of critical inputs to the downstream industry, like propylene and ethylene, is all for the domestic markets; c) PEQUIVEN is more directly involvedin downstreamactivities, through joint-ventureswith the private sector, than the CVG firms.
2.68 Payments. While most SOEs are said to have no commitmentto delivery .iming,it appears to be their common practice to collect in advance for private orders. In contrast, private firms have had difficulties collectingfrom some SOEs. Recently, the SOEs have accumulatedlarge arrears among themselves, and also vis-a-vis the private sector.
2.69 Ouality control. Quality control is a problem in public and private firms. These problems are exacerbatedwhere firms are exempt from competitivepressures. The problems reflect in lack of commitmentto product specificationand in low product durability.
2.70 Price/Ouota arrangements. Until recently, the domestic price of aluminumwas much lower than the fob export price, and the domesticdistribution of primary aluminumby CVG was based (33 1 on installed capacity in the downstream firms. This quota system is probably not binding now when significantexcess capacity prevails amongdomestic aluminum manufacturers. At the time of this writing, FERROMINERA,the CVG-run iron ore supplier, charges a higher price to SIVENSAthan to SIDOR (a scheduleof price increases is in effect to raise the domesticprice to all users to the fob export price); while some CVG companiessell among themselves on a cost-recoverybasis with no reference to fob export prices (FESLVEN to SIDORfor example).
2.71 Services gift. With respect to services, the major concerns by all firms interviewed are unreliability, cost, and insufficiencyof Government-suppliedservices. In particular, communications (telephones),transport (internationalshipping), ports, and electricity.
2.2.4 Impact on the Industrial Private Sector
2.72 Through their pricing policies and product and service quality, the SOEs affect private profitabilityand internationalcompetitiveness. In the past, firms benefittedfrom the low prices at which SOEs sold most of their products domestically. However, as part of the pricing and trade reforms, underway since early 1989, prices are being raised while the SOEs' poor quality and service still undermineprivate activity.
2.73 Untimelydelivery makes inventorymanagement costly through unmatcheditems, costly overstocks,and lack of imports as a backup. More than one firm reported having temporarily suspended production due to lack of supplies. To guarantee deliveries, private resources were used to lobby executivesfrom the SOEs. And before the trade reform, commissionswere paid to the SOEs for import authorizations. Through those fees the SOEs effectivelydetermined the domestic price of imports. Moreover, to obtain import authorizationsthe private firms were required to buy unneeded items from the SOEs and sell them within the domestic market.
2.74 The allocationsystem based on installedcapacity followedby the CVG firms supplying primary aluminummight have resulted in over-capacityamong private aluminumusers. (They produce mostly for export markets as do the SOEs.) As of end 1989, most primary aluminumproducers were much below capacity. This is partly because the domesticprice of primary aluminumincreased toward the fob export price reducing profitability,and domesticdemand declined with the recession. Moreover, in spite of a higher exchangerate than in previous years and the 30 percent export subsidy, exports did not increase enough to compensatefor the reduced domestic demand. This might be the result of the countervailingduties that apply to Venezuelan exports of aluminumproducts in the U.S. (See U.S. Department of Commerce, InternationalTrade Administration,C-307-702.) Recently, a U. S. court nullifiedunfair trade findings against Venezuelanaluminum manufacturers, revoking the countervailing duties imposed in 1988.
2.75 Some private firms have facilitiesto compensatefor the deficienciesof public services. SIVENSA maintains a communicationssystem; one of the cement companies has an electric power facility; and most cement companiesoperate their own ports under governmentconcessions. Telephone lines are limited. The next new line in Barquisimentois not expected for years. At the current low prices, telephone calls, FAX, and other electronic data transferring operations overload the telephone system. Inefficienciesat the ports are likely to reduce the export competitiveness,increase the landed cost of imports, and serve as a barrier to trade. [ 34 1 2.76 On the positive side, one firm indicated that the CVG firms play a major role in the developmentof basic infrastructurn k,the Guayanaregion, promotingthe establishmentof private firms in the area. SIVENSAis believedto have flourishedunder the importprotection and inefficiencyallowed to SIDOR. And several firms believe that having joint-ventures with the SOEs in the downstream industry has improved their bargaining power in most of their productiveoperations. This is mostly through better delivery service and access to information.
2.2.5 Recent Policy Changes
2.77 The pricing and trade reforms changed significantlythe economicenvironment faced by SOEs. Moreover, the Governmentis restructuringand privatizing the SOEs.
2.78 Domesticprices of primary aluminum,steel, and petrochemicalproducts have been raised to reflect their opportunitycost. And iron ore prices to all users will be at export opportunitycost in the near future; a schedule of price increases is in effect betweenFerrominera and SIDOR. The CVG prices of bauxite and alumina for dome3ticuse take internationalquotations as a reference. The CVG used to allocate primary aluminumamong domestic manufacturesaccording to installed capacity. This system is probably not binding now when significant excess capacity exists and CVG is able to charge export opportunitycosts.
2.79 The import monopoliesgranted the SOEshave been eliminatedand imports are providing competitionto the state monopolies. Venezuela's accession to the GATT on September 1, 1990 has reduced fears of policy reversals among some entrepreneurs.
2.80 To redefine the role of the public sector and ensure that it will be more strategic, selective, and transparent, an overall government strategy specifying the role of the public sector is needed. To this end, the Governmentrecently invited21 national institutionsto a major review of the roles of the public and private sectors in the production of goods and services.
2.81 A restructuringand privatizationprogram was started with the objectivesof: (a) reducing the dominanceof the public sector; (b) improvingthe competitiveenvironment for the private sector; (c) increasing the efficiency of and rationalizing pricing policy in public enterprises; (d) promoting clarity, transparency, and accountabilityin the relationship between the Central Government and the public enterprises; and (e) laying a base for stronger public finances over the medium and longer term. The reform in the first two years will focus on restructuringabout 11 priority public enterprises, the privatizationof about 100 more, and establishmentof transparentinstitutional relationships between the central Governmentand remaining public enterprises.
2.82 The interministerialcommittee for privatizationidentified about 100firms to be privatized in the medium term. These include three banks, 17 hotels, two airlines, and the telecommunications company. The FIV, used in the past to channelpublic funds to the SOEs, is being restructuredto be the implementingagency, and at least five firms have been brought to the point of sale. Eight major SOEs have been selected for restructuring, including the public ports. Restructuring of the ports involves liquidatingthe current ports agency (InstitutoNacional de Puertos, INP), granting concessionsto private operators, and establishinga new regulatory regime. Finally, the new regulationon foreign investment (Decree 727, see Section 3.3.1) increasedsignificantly the opportunitiesfor foreign ownership. (35 1 2.83 The overall reform program and the recent changes in the role of the FIV and public enterprise managementare increasingthe transparencyof the economicenvironment and reducing the privileges and protection to the SOEs. As foreign competitionincreases and SOEs are forced to show acceptable financial results to attract private financing, better output quality and delivery services are likely from all industrial firms.
2.2.6 Recommendations
2.84 This section supports the Government's medium-term agc.ida for restructuring and privatization. To the extent that privatizationwill ba done gradually,additional policy changesthat would increaseprivate participationin SOEs, and market disciplineon the SOEs are outlined here.
2.85 The privatizationand restructuringplans for the SOEs should be publicly announcedat an early date. Petrochemicaland chemicalexecutives complain about not knowing PEQUIVEN's plans; and the discussionon the "hydrocarbonslaw" is delayingprivate decisions in related activities.
2.86 In response to the trade reforms, the private firms are changing their product lines keepingonly those wherethey are more competitiveand addingnew ones. Moreover,joint-ventures with the SOEs have been very advantageousto the overall activitiesof firms like SIVENSAand Corimon; in the transition, these arrangementsmight be critical for both private and public firms. In the transition to privatization: ALCASA should consider increased private participation in producing primary aluminum,and encouragingprivate developmentof other activities;PEQUIVEN shoul[ considerprivate participationin basic products like ethyleneand propyleneand the feasibilityof reducing its downstream activities; and SIDOR could concentratein certain groups of products, and decentralize the production and managementof small orders (such as sellingbottle tops to Polar).
2.87 Full implementation of the trade reforms-including elimination of import tariff exemptionsfor SOEs, and the export subsidy-will increasethe pressure on all firms to be internationally competitive. As domestic prices are raised to internationallevels, and the export subsidy is eliminated, the bias in favor of foreign customers will be reduced. Imports are likely to improve inventory managementand increase pressure on the SOEs to improve qualityand delivery. Moreover, the private sector is likely to get better paymentterms through suppliers' credits than the current policy by SOEs.
2.88 Uniformpricing betweendomestic and foreign markets is essential. Differentiatedprices encourageunwillingness to supplythe domesticmarket, poor quality and specifications,need of private firms to lobby SOEs' managers, etc. Moreover, transfer prices on a cost recovery basis--ratherthan a market-pricebasis--between SOEs foster waste and discriminationagainst private firms.
2.89 Governmentfinancial support to SOEs shouldbe phasedout and SOEsshould be required to be financiallyself-sufficient in their operationsand be able to financetheir investmentsfrom internally- generated funds and commercialfinancing (private equity and non-guaranteedborrowings). In the past, commercialbanks have been reluctant to lend to SOEs without a Governmentguarantee due to country risk and the financial situation of particular SOEs. However, it is expected that an increasingnumber of SOEs will attract non-guaranteedfinancing as a result of sustainedmacroeconomic reforms and the Government's efforts to restructureproblem enterprises.
2.90 The experienceof the recent past, as well as cross-countryevidence (see, e. g., Krueger 1990), suggest that needed policy changes are more difficult to implementwhen public ownership is [36 1 present. This is partly the result of political pressures. Therefore, there is a case for accelerating medium-termobjectives. During the transition the firms that would remain publicly owned should be closely monitored.
2.3 Other InstrMmentsof Industrial Policy4
2.91 The Government also influencedthe allocationof resources through direct interventions to control the prices of virtually every item producedin the country, through subsidiesfor selected food products, through directed credit, and through a wide range of tax exonerationsand credits. These were generallyuncoordinated, and it is impossibleto estimatetheir combinedmagnitude, incidence,and effect on resource allocationwith existingdata.
2.92 The one vehicle which could have been used to coordinate industrial incentiveswas the Registro de Informaci6nde Proyectos Industriales (RIPI) maintainedsince 1974 by the Development Ministry. The RIPI was an instrumentto direct investmentto selected sectors. Approval of a project was necessaryfor certain incentives (fiscal benefits, trade and foreign exchangepreferences, financial). These incentiveswere large and rejection by the DevelopmentMinistry virtually precluded investment. Applicationfor the RIPI was costly and time-consuming.The DevelopmentMinistry generallyused the registry to favor import substitution,to direct investmentaway from the Caracas area, and to prevent expansionin industrieswhere there was thoughtto be adequatecapacity. While the RIPI could have been an instrumentfor coordinatingthe diverse benefits to industrialprojects, programs which depended on RIPI status were administeredindependently and total benefits were uncontrolled.
2.93 Under the Government's reform program, the RIPI has been converted into a registry which is used only for information. The DevelopmentMinistry does not exercise discretion in listing projects on the registry, and listing does not convey any special benefits to investors.
2.3.1 Price Controls
2.94 Price controls were establishedin August 1974. During the 1980s,the Governmenthad reasons-based on other policy-induceddistortions-for controllingprices. With large sectors protected against foreign competitionby import licenses, price controls could, if effectivelyapplied, reduce the potential for monopolyprofits. Further, with preferentialforeign exchangeintended to assist the poor, price controls could be used to ensure that the benefits weren't capturedby importers. Less legitimately, price controls were intendedto reduce inflation.
2.95 The systemof price controlswas changedfrom t.me to time and, in principle, every price in Venezuelawas controlledby the DevelopmentMinistry. By the time of the reforms, the controlswere administeredby dividinggoods into three classes:
* Regulatedgggb. 43 basic necessities(common food and householditems-pharmaceuticals, medical services, electricity, urban and intercity transportation)whose prices could not be changed without
'Thissection is largely based upon World Bank(1988a) and drawsupon chapterswritten by Kris Hallberg, EduardoBitran, and Charles McClure. [ 37 1 approval by the Costs, Prices, and Salaries Commissionwhich included government, producers' associationsand labor representatives.
* Controlled goods. 86 priority goods and services including food and householdproducts, motor vehicles, and some production inputs whose prices could not be changed without approval of the DevelopmentMinistry.
* Superised goods. For all other goods, the DevelopmentMinistry had to be informed thirty days before a price increase. If the Ministrydid not object, the increase could be introduced.
2.96 We do not have data to determine whether the controls achieved the objective of providingfood to the poor. There are data which show that the prices of regulatedand controlledgoods rose less quicklythan the others. However, there were serious shortagesof several items--rice, edible oils, milk, corn, and meat--as producers refused to produce and retailers refused to sell at controlled prices. Illegal exports were a common way of avoiding price controls. And some shortages were avoided by loopholes: chickens could be sold at a higher price in parts than whole; tuna in small cans was controlledbut in large cans was not; products were withdrawnfrom the market or modified; tie-in sales were used to force consumersto buy uncontrolleditems with the controlleditems. All these effects were felt more harshly by poor consumerswho had fewer alternativesor means to purchase substitutes.
2.97 With regardsto protectingconsumers in imperfectlycompetitive markets, the systemmay have been harmful by encouragingcollusion among producersas they negotiatedprice increases with the DevelopmentMinistry. Certainly, for traded goods, a more nearly uniform level of import competition would have been a more efficientsystem to ensure competitivepricing. The Governmentrecognized this in its reform program and controls were retained for only 17 items.
2.3.2 FinancialIncentives
2.98 The Government influencedthe cost of credit to industry by channelling resources on favorableterms through specializedinstitutions or second-tierlending through commercialbanks. The Fondo de Credito Industrial (FONCREI) finances large- and medium-scaleprivate firms and the Corporaci6nde Desarrollo de la Pequefhay Mediana Industria (CORPOINDUSTRIA)finances private small- and medium-scaleenterprise. The Fondo de Inversionesde Venezuela (FIV) lends mainly to public sector enterprises, and FONTUR lends for tourism. In June, 1987, FONCREI and CORPOINDUSTRIAaccounted for about 1 percent of total banking system credit.
2.99 FONCREIfinanced fixed investment and working capital through financial intermediaries. The amount and terms of loans were made by the FONCREI AdministrativeBoard with agro-industry and import substitutionbeing priority activities. Other criteria were use of locally produced inputs, net contributionto foreigniexchange, and employmentgeneration. In 1988, interest rates were 11 percent- 13 percent at a time when commercial lending rates regulated at 13.7 percent, but extra fees and compensatingbalances brought them effectivelyto 20 - 22 percent.
2.100 Relative to the trade subsidies, the credit subsidieswere small. FONCREI ha' 2,255 million bolivares credit outstandingin the June, 1988. With an interest rate subsidy of 7 - 11 percent, the total subsidy in FONCREIcredit amountedto about 160- 250 million bolivares, or .02 -.03 percent of 1988 GNP of 896 billion bolivares. CORPOINDUSTRIAhad outstandingonly about one-third as [ 38 1 much credit as FONCREI, although it offered slightly deeper subsidies with lending rates ranging between four and 10.5 percent in 1988.
2.101 These two are among the four most important government development finance institutions(the others being the Export Financing Fund and the AgriculturalCredit Fund). They both have a significant mismatch between the average interesnt rate in the loan portfolio and their cost of funds. FOCREI's cost of funds is approximately24% while the average return on its loan portolio is 10%. A large part of its loans are at fixed rates. CORPOINDUSTRIA,mostly a first-tier institution, has weak loan supervisionand its proceduresfor loan recovery ard poor.
2.102 The Governmenthas begun reforms to liberalizefinancial policy, to reduce its direct role in intermediation,and to strengthenthe competitivenessand financial conditionof intermediaries. In the medium-term,it will simplifythe rates offered by government-owneddevelopment finance institutions by establishingtwo preferentialrates at levels substantiallyabove current levels, and will consolidateat least five funds into two new second-tiercredit institutions.
2.103 A further factor influencingcredit allocationin the 1970sand 1980s was the Venezuelan InvestmentFund (FXV) which channeledpetroleum revenue into state-ownedindustrial projects. The F1V was established in the mid-1970s with the intention of creating a strong financial entity that would allocate, in an independentand technically-soundfashion. an earmarkedportion of the petroleumsurplus (5% of the Government'soil and natural gas income). Giventhat the Govermment'sdevelopment strategy during the 1970s focussed on public sector developmentof basic industries, the FIV's Lole consisted mainlyof financingpower, steel, aluminum,mining, ports, and shippingprojects. Initially,the financing was generally provided in bolivares-denominatedlong-term loans. However, when some enterprises showed signs of financial distress in the 1980s, most of the FIV's loans were converted into equity. By end-1988, 95% of its public enterprise loan portfolio (75% of its assets) were non-incomegenerating equity (totallingBs. 126 billiou or roughly $2.5 billion at current exchangerates). In addition, the FIV continuedto provide roughly $500 million annuallyin transfers to its SOE holdings, often to assist with servicing foreign debt.
2.104 By 1989, this practice was no longer sustainable. Consequently,a major element of the macrecopomicadjustment program has been the reorganizationof the FIV. In late 1989, the Govermnent decided in principle that the FIV would withdrawfrom direct lending and investmentsand refocus its activities towards privatization as the implementing agency for the Government's Privatization Commission. Legislationhas been submittedto Congress revising the FIV's role and authorizing its phased withdrawalfrom direct lending and investment(after meeting its existing obligations)during the next five years.
2.3.3 Tax Policy
2.105 Venezuela's level of taxation-measured by the ratio of tax revenue to GDP-is comparableto other developingcountries with similar levels of income, but the structure is different. Venezuelarelies relativelymore heavilyon company incometaxes Qargelyon the petroleumsector) than other LDCs and much less on individual income taxes, indirect taxes on consumption, taxes on internationaltrade, and payroll taxes. This is true despite a broad systen of exemptions,exonerations, and investment incentives that reduce substantially the tax burden on selected industries. These provisions,together with widespreadevasion which is possiblebecause of poor administration,mean that relatively high statutory tax rates are required to maintain the present revenue yield. Data are not [39 1 availableto estimatethe magnitudeof the various incentives. While collectionsfrom the non-petroleum corporate sector are relatively lower than in other countries even though tax rates are high, it is impossibleto determine whether this is because the incentivesare so great or evasion is so widespread.
2.106 The major defect in the corporate income tax is the wide range of exonerations and investmenttax credits. Incentivesexist for agriculture, pollutioncontrol, construction,fishing, mining, tourism, transportation,regional development,exports, and a range of financial activities. Between 20 and 100 percentof incomein certain activitiesis tax-free. Interest on loans for favored investmentsand dividends paid from income earned in agriculture and some constructionare tax-exempt. Investments in some sectors are eligible for credits against tax of 15 percent of the investment-25 percent for producers of capital goods. These preferences reduce the tax base, create opportunities for evasion, distort resource allocationand, because they are so widespread,lose much of their force.
2.107 Venezuelaapplies progressivetax rates to corporateprofits-15 percent, 35 percent, and 50 percent. This is believedto have contributedto fragmentationof corporations. Further, the top rate is abovethat appliedin many countrieswhich would competeagainst Venezuela for investmentand places the country at a disadvantage. Eliminationof exonerationswould allow reduction of the top rate to a competitivelevel without reducing tax revenues.
2.108 The Government has acknowledgedmany of these defects in the tax system and is submittinglegislation-in consultationwith the IMF-to improve it. Improvementswould include lower corporate tax rates and introductionof a value added tax. The Government is also using technical assistancefrom internationalconsultants to improve tax administration,including reform of the customs service to facilitate trade.
2.3.4 ProductionSubsidies
2.109 Direct subsidiesto producers-a generally less distortingincentive than trade, fiscal, or financial policies-were not widespread. The subsidieswere related to food production and distribution and were intendedto assist the poor. While the subsidieswere not as large a percentageof GDP as the trade distortions,they were large relativeto the size of the marketsthey affected. They distorted resource allocationand were an inefficientmethod of transferring resourcesto the poor.
* Feltilizers. PEQUIVENproduced fertilizers which were distributed by PALMAVENto farmers at 50 percent of productioncost in 1984, with the Governmentpaying the rest. The subsidy went from 411 million Bs. in 1984 to 3192 million Bs. in 1988 (about .4 percent of GDP). The increase was explainedby a 120 percent increase in production and a rise in general costs from Bs. 678 to Bs. 2413. The low domesticprice of fertilizer led to increaseddemand which was beyondPEQUIVEN's capacity, and fertilizer imports (at the preferentialexchange rate) went from virtually nothing in 1983 to US$180 million in 1988.
* Concentrated Animal Feed. The Government introduced this subsidy-equal to 30 percent of the producer price-on feed for dairy cattle, in 1987, when its cost was 952 million Bs. (.1 percent of GDP). (The feed also benefittedfrom preferentialexchange rates for sorghum, soybeans, and wheat wastes, estimatedto be Bs. 1600 millionper year.) The subsidy had a perverse effect of discouraging ranchers from their normal practice of growing a portion of their feed requirementssince they would not benefit from the subsidies. [401
* Powdered Milk. Two grades of powdered milk were sold in 1988: inexpensiveat Bs. 14 per kilo and commercialat Bs. 31.5 per kilo. Both were subsidized. The total subsidy was Bs. 2460 million in 1988(about .3 percentof GDP). The milk is a blend of domesticand importedpowdered milk and there is an exchangerate subsidy for the importedmilk of Bs. 1330 million.
* Pre-cookedCorn Meal. The subsidy on harinapan was Bs. 2 per kilo (one-thirdof the retail price) in 1987. The cost of the subsidy was Bs. 800 million, .1 percent of GDP.
* Coffee. In 1987a subsidy was introducedon the purchase of coffee beans for processing and sale to the domestic market, and totaled Bs. 720 million in the 1987-88 season. FONCAFE has a monopolyon the export of coffee beans and also fixes producer prices. About 15 percent of the crop was exported (10 percent withinthe export quotas and 5 percent off-quota). FONCAFE receivedBs. 195 million in export subsidiesin 1988. The price of coffee to the processing industrywas equal to 40 percent of the averageprice to producers.
2.110 These subsidieswere not directed toward the poor, but enriched all consumers-without regard to their income--inproportion to the amountthey consumed. The subsidiesfostered widespread smugglingout of the country, particularlyof fertilizers. A distributor of harinapan said that when he visitedthree U. S. cities he found only product which had been packagedfor sale in Venezuela,produced under Governmentsubsidy. Under the Government'sreform program, all subsidies-exceptfor powdered milk and fertilizer-were abolished.
Matds11, 1991: 2:26pn 3. POLICIES AND PERFORMANCE IN THE MANUFACTURINGSECTOR
3.1 Growth of the manufacturingsector, which averaged3.9 percent between 1975 and 1988, was achieved with large public investments, import protection, and targeted incentives. This chapter examinesthe consequencesof industrialand trade policies as they affectedthe structure of manufacturing, behavior of firms, and performance (Section 3.1). The cost of the industrialpolicies of the 1970s and 1980 is reflected in reduced productivity, low capacity utilization, and the failure of Venezuelanfirms to compete in internationalmarkets. The role of the labor force and labor legislation is explored in Section3.2, and the impact of foreign investmenton manufacturingis examinedin Section3.3.
3.2 The primary data for this chapter are the Venezuelanindustrial survey (EnquestaIndustrial) for 1975-88 (except 1980)1which is conducted by the national statistical bureau (Oficina Central de Estadistica e Informatica, OCEI), an autonomousgovernment agency. The survey covers all plants in the formal sector with more than 50 workers, as well as a large sample of smaller plants. The survey ranges from a low of 3,955 plants in 1982 to a high of 6,044 in 1978. OCEI also calculatesthe sample weightsattached to the smallerplants, whichpermits aggregation of output and other variablesto estimate the total value for all manufacturing. Unless indicated otherwise, totals in this paper represent all manufacturingoutput, aggregated from the OCEI sample using the survey weights. We have not attemptedto verify independentlythe accuracyof the data. Although,by law, respondentsare guaranteed anonymityin respondingto the survey, it is unclear whether there are (real or perceived) incentivesto misrepresentinformation.
3.1 Overviewof the Manufacturing Sector: Structure. Behavior, Performance
3.3 This section is an overview of the structure of manufacturing,the behavior of enterprises, and their performance. Section 3.1.1 examines the compositionand share of manufacturingin GDP, regional distribution,and concentrationover 1975-88. Section3.1.2 examinesenterprise behavior and relates behavior to the structure of the sector. Section 3.1.3 describes the performance of the sector, includinggrowth of manufacturingvalue-added, productivity, capacity utilization and export orientation.
3.1.1 Structure of the ManufacturingSector
3.1.1.1 Share of Manufacturingin GDP
3.4 Manufacturingin Venezuelahas been small comparedto total industrialoutput because of the dominanceof crude oil. The share of industry in GDP was 38 percent in 1987, while the share of manufacturingwas 20 percent (Table 3.1). Althoughmanufacturing increased from 12 percent of GDP in 1968, it is lower than in other countries at comparablestages of development. Manufacturingwas 28 percent and 25 percent of GDP for Brazil and the Philippinesin 1987, yet per capita GNP was significantlylower than in Venezuela. Figure 3.1 shows the relationshipbetween manufacturingand per capita GNP in elevencountries. Venezuela'srelatively low share of manufacturingoutput for its income level is similar to other oil-producingcountries.
'The industrialsurvey is not taken in censusyears (1970, 1980,...). The most recentsurvey (1989) was not availablein March, 1990. 42]
Figure 3.1: Share of Manufacturing in GDP, 1987; International Comparisons.
Mfg. as % of GDP 50%
40% -
0 30% -, .o
20% o 0
10% _
0% I I I 500 1000 L500 2000 2500 3000 3500 4000 4500 Per Capita GNP (US$)
Soure: Word Tables, 1989.
Table 3.1: Manufacturing as a Percentage of GDP, 1968 and 1987.
GNP/capita GNP/capita 1968 1987 L12D 1968 1987 L187l
Venezuel 12% 20% $3,230 Argentina 29% 24% $2,390 Brzil t 30 29 2,020 Colombia 18 19 1,240 Korea 14 39 2,690 Mexico 21 24 1,830 Peru t 23 22 1,470 Singapore 23 28 7,940 Thailand 16 25 850 Turkey 21 26 1,210 Philippines 24 26 590 Trinidad/Tobago 12 26 4,220
Nota: t 1968 and 1986 values. t 1970and 1987values. (Pecntages of contait 1987values of mfg., GNP.) Source:W orabld 1989-90. [43 1
Table 3.2: Share of ManufacturingOutput by End Use.
1975 1979 1981 18 19
Non-DurableConsumer Goods 35.1% 31.3% 34.0% 34.2% 34.3%
Food 23.7 23.1 25.0 25.4 24.0 Other Food Products 2.6 2.4 2.2 3.0 3.0 Beverages 4.6 5.4 5.7 5.1 4.7 Tobacco 1.2 1.4 2.2 1.9 1.9 Textiles, Clothing, Leather 11.4 8.2 9.0 8.8 10.3
ConsumerDurables and Intermediates 47.9 49.4 48.0 51.7 46.3
Wood and Furniture 2.7 2.5 2.1 1.9 2.0 Paper and Printing 5.2 4.9 4.6 5.0 5.4 Chemicaland Rubber Products 11.1 11.7 12.0 14.1 15.6 PetroleumRefining 20.1 20.1 17.7 17.9 10.3 Non-MetalMineral Products 3.4 4.3 4.0 3.7 4.0 Basic Metals 5.4 6.1 7.4 9.3 9.0
Capital Goods 16.5 18.8 17.4 13.5 18.7
Machineryand Equipment 8.4 10.8 9.7 8.2 11.6 Transport Equipment 8.1 8.0 7.7 5.3 7.1 OtherIndustries 0.5 0.5 0.6 0.6 0.7
Source: OCEI.
3.1.1.2 Compositionof Output 3.5 After WorldWar n, Venezuelanindustrialization was based on import substitution. Manufacturinggrowth was primarily in non-durableconsumer goods (food, textiles, clothing) which, in 1975, accountedfor 35 percentof manufacturingoutput (Table 3.2). Followingthe oil boom, an overvaluedexchange rate led to a surgein consumerimports, and the share of consumernon-durables in manufacturingdropped to 31 percentin 1979.However, protection on consumergoods was increased, and the shareof consumernon-durables has beenabout 34 percentof manufacturingoutput in the 1980. 3.6 Nationalizationof the petroleumsector in 1975 and oil price rises led to increased governmentrevenues which were investedin publicsteel, aluminum,and petrochemicalplants. These investmentswere based on a policyof governmentcontrol of "basicsectors." The governmentalso soughtto developpetrochemicals and steel industriesdownstream from the country'snatural resource base. Refining,petrochemicals, and steel accountedfor 36 percentof manufacturingoutput over the 1970sand 1980(Crable 3.2). [441
Table3.3: Shareof Manufacturing Value-added by Subsector, 1985.
Developed Lat. Subsector Economies NIC's Amer. Venezuela
31 Food, Beverages,& Tobacco 14% 15% 30% 22% 32 Textiles, Apparel, & Leather 8 17 14 8 33 Wood, Wood Products 3 3 8 2 34 Paper & Paper Products 6 4 2 5 35 Chemicals, Petrol, & Products 16 17 16 40 36 Non-MetallicMineral Products 5 6 6 4 37 Basic Metal Industries 7 9 8 9 38 Metal Products, Mach. Equip. 40 26 1S 11 39 Other Manufacturing 1 2 0 1
Source: World Bankstaff calculationsbased on data from OCEI and "Colombia:Industrial Competitionand Performance,"World Bank.
3.7 The top four industries (out of over 70 at the 4-digit ISIC level) accounted for 27 percent of non-petroleum output in 1975 and 24 percent in 1988. There has been some diversification, as the share of refining recently fell and the share of chemicals and steel increased (Table 3.2). Part of this effect, however, is due to declining petroleum prices.
3.8 In the 1970s, protection and industrial incentives were used to subsidize development of a capital goods industry. Growth was encouraged by policies such as the Buy Venezuela Act, a law which provided incentives for firms to purchase from local producers. However, the share of machinery and equipment has remained less than 20 percent. As a share of value-added, capital goods were 11 percent in 1985, lower than the average for newly industrialized countries (NIC's) as well as for Latin American countries (Table 3.3). In comparison with NIC's or Latin American countries as a group, Venezuelan manufacturing is specialized in basic industries. The share of value-added in basic industries is higher while the share in textiles and capital goods is lower. Half of manufacturing is chemicals, petro-chemicals, steel and aluminum. This pattern reflects the government's policy of developing sectors in which it believes Venezuela has a comparative advantage. This specialization has led to an economy sensitive to international price changes in key sectors: petroleum, aluminum, or steel.
3.1.1.3 Size and Location of Manufacturing Plants
3.9 Size distribution. The size distribution of plants has remained stable over 1975-1988 (Table 3.4). The share of plants with fewer than 50 employees was 84-86 percent over 1975-88. The percentage of plants with 50 to 100 employees fell from eight percent in 1975 to six percent in 1988, while there was an increase in the percentage of firms with more than 100 employees from eight percent to ten percent. [ 45 1
Table 3.4: Distributlon of Plants by Size, 1975-1988.
Emolm 197 1977 1979 181 U 12M 198681
1-49 84% 86% 85% 86% 86% 85% 84% 50-99 8 6 7 7 7 7 6 100-199 4 4 4 4 4 4 5 200 + 4 4 4 4 4 4 5
Soure: World Bankstaff calculationsbasd on OCEI data.
Table 3.5: Comparison of Plant Sizes, 1984.
Eplovees Venezuela Colombia Chile
10-49 78% 69% 85% 50-99 10 1S 8 100-199 7 8 4 200+ 6 8 3
Source: Roberts(1989), Tybout (1989), World Bank staff alculations basedon data from OCEI
3.10 The distributionof plant sizes in Venezuelais roughly similarto Chile's and Colombia's (Table 3.5). In 1984, 85 percent of manufacturingplants in Chile and 69 percent of plants in Colombia were &;nall(10-49 employees),while the figure for Venezuelawas 78 percent. In all three countries,the share of medium-sizedenterprises (50-99 employees)is relativelysmall. In Venezuela,while 78 percent of plants had fewer than 50 employeesand 13 percent had at least 100, only ten percenthad between 50 and 99 employees. This distribution is likely to reflect both technologicaland policy factors. In Venezuela,large plants in heavy industriessuch as steel are necessaryto exploit economiesof scale. At the same time, half the plants are small enterprisesproducing apparel, food products, and furniture (see Table 3.8). For the smallest category (under 50 employees),the averageplant had 17 employeesover 1975-88.
3.11 Some economicpolicies have discriminatedagainst smaller enterprises. Beforethe 1989 reforms, registeringan investmentproject was costly and time-consuming. Registrationqualified a firm for incentivessuch as preferential exchangerates, duty-free inputs, and investmentcredits. The high fixed cost of seeking approval favored large firms and large projects. Another incentivewhich favored larger firms was the Registry of Informationon IndustrialProjects (RIPI), and its use in orienting public procurementtowards domesticproducts. RIPI status was necessaryfor firms to sell to public enterprises. [461 Small and medium firms registered less frequently because it was costly and the incentive structure assumed firms were capable of sellingto large enterprises and importinglarge quantities.
Table3.6: Distribution of Manufacturing Plants by State, 1975488.
STATEe 17 19 1979 19,81 1984 1986 1988
Miranda 19.4% 18.3% 17.2% 13.8% 20.2% 19.3% 19.3% Federal 20.0 15.3 14.0 10.8 17.4 16.4 16.3 Aragua 7.8 6.3 7.3 10.2 10.2 10.5 10.9 Zulia 11.2 11.9 11.6 12.8 9.4 9.8 9.7 Cambobo 7.8 6.2 7.8 10.6 9.5 9.4 9.2 La= 4.7 7.9 7.4 7.8 6.3 5.8 5.8 Tachira 4.8 6.9 7.2 7.4 5.0 5.5 5.4 Bolivar 4.3 4.5 5.0 4.5 4.4 4.8 4.6 Anzoategui 4.0 5.0 4.0 3.5 3.0 2.9 3.1 Guarico 1.8 1.4 1.4 1.7 2.6 2.6 2.6 Merida 1.7 2.2 2.9 2.8 1.7 1.8 2.0 Portuguasa 2.3 2.2 2.1 2.1 1.4 1.6 1.8 Trujillo 1.8 1.7 2.5 1.9 1.4 1.6 1.6 Sucre 1.7 2.2 1.9 2.0 1.6 1.6 1.4 Falcon 1.2 1.6 1.6 1.7 1.2 1.3 1.3 Monags 1.5 1.7 2.0 1.6 1.2 1.2 1.2 Yaracuy 1.1 1.0 1.1 1.3 .9 1.1 1.1 Barinas 1.3 1.7 1.7 2.0 1.0 1.1 1.1 Nueva sparta .4 .7 .8 .6 .6 .6 .6 Cojedes .6 .4 .3 .5 .5 .5 .5 Apure .4 .6 .2 .2 .3 .3 .2 Delta nAacuro .2 .2 .1 .1 .1 .1 .2 Amaz)nas .2 .1 .1 .2 .1 .2 .1
Soure: Wodd Bankstaff calculationsbased on data from OCEI.
3.12 Plant Locations. Industrial developmenthistorically centered on the central-northern- coastal (CNC) region, where the largest markets were located. Table 3.6 shows that the proportion of manufacturingplants in Caracas (Federal) and surroundingareas (Aragua,Carabobo, Miranda) was about 55 percent in 1975. Policies may have encouraged the centralizationof manufacturing. Apart from proximityto markets and access to better communicationand transportation,the CNC region benefitted from subsidized infrastructure and better access to the central government which grants industrial incentives.
3.13 Subsidiesin housing and utilities, better infrastructure, and governmentservices made the region attractive, despite increasingcosts for land, energy, and water. Price controlson major goods reduced regional differences. Housing, water, and other infrastructure were provided at relatively uniform, subsidizedrates throughoutthe country. However, since Caracas is further from the country's natural resource base, the subsidiesto water and electricityare implicidygreater. In addition, the higher cost of land in the CNC region impliesa greater subsidy for housing. [471 3.14 LocationalIncentie. To promote regionalindustrialization, the Governmentprohibited new activities in the Caracas area and offered incentives to firms in developing regions. Legislation passed in 1974, which remained essentiallyunaltered until 1988, provided four types of incentives:(1) exemptionsof import taxes for capital goods or inputs; (2) income tax exemptionsover five years; (3) constructionof industrialparks; and (4) soft loans from public funds. In addition, regionalcorporations were created in the 1960s to plan regional development, finance industrial parks, and support establishment and expansion of firms. According to Hausmann (1989), regional development was abandoned in 1984 because of conflictswith regionalgovernors and because most regional development banks went bankrupt.
3.15 Regional incendves and corporations have not altered significantly the location of manufacturingactivity (Table3.6). Between 1975and 1988, the distribudonof plants across the 23 states was stable. In 1988, Caracas and surroundingareas contained55 percentof manufacturingfirms, equal to the share in 1975. Althoughthere was some dispersionbetween 1975 and 1981, when plants located in Caracas declined from 20 percent to 11 percent, this was short-lived. If sales across states (Annex Table A.2. 1) are used to measure dispersioninstead of number of establishments,the share produced in the Caracas area accountedfor 77 percentof output in 1975, 71 percent in 1981, and 69 percent in 1988.
3.16 Assessment. The location policies of the 1970s have not had a clear effect in moving production out of the Caracas area. Althoughrestrictions on plant location led to a reductionof plants located in Caracas from 20 percent in 1975 to 16.3 percent in 1988, most plants seem to have moved to the surrounding areas. In 1975, 55 percent of plants were in Caracas, Miranda, Aragua, or Carabobo, and the percentage had risen to 55.7 percent in 1988.
3.17 Locationalchoices are affected by many factors including infrastructure, proximity to markets, and costs and quality of labor, raw materia;s, and services. In Venezuela, it is likely that locationaldecisions were affectedby (1) subsidiesfor infrastructureand energy which equalizedregional differencesin accessibilityand costs and (2) proximityto agenciesresponsible for allocating investment licenses and other incentives. To offset these factors, locationalincentives would have to be large. A more efficient approach would be to set prices for utilities and housing services which reflect regional differentialin costs and demand. Recentmeasures to make investmentlicensing automatic reduce the bias favoring the CNC region.
3.1.1.4 Concentrationof Production
3.18 Plant Concentration. Althoughmanufacturing growth averaged3.9 percentbetween 1975 and 1988, production continuedto be concentratedamong the largest plants. Table 3.7 compares the distribution of plants in 1975 and 1988 according to the degree of concentration. Concentration is measured by the four-plant concentration ratio (CR4), the share of the four largest plants in each subsector. Since several plants may be controlled by one firm, these data only measure technological factors and would understate the economic concentration in subsectors where an entrepreneur owns multipleplants.
3.19 In 1975, 58 percent of all sectors had concentrationratios of 50 percent or greater. In 1988, this figure declinedto 53 percent. This relativelyhigh concentrationdoes not reflect a paucity of firms (able 3.8). In tobaccoproducts, for example,the share of the top four plants exceeded95 percent yet there were over 30 plants reporting to OCEI. [48 l
Table 3.7: Concentratlon of Productlon, 1975 and 1988.
Four Plant 1975 1988 ConcentrationRatio Ind a Pf n Industrisa Pcrcnt
76- 100% 21 28% 17 23% 51- 75 22 30 23 31 26- 50 22 30 23 31 0 - 25 9 12 12 1S
TOTAL 74 100% 75 100%
Source: World Bankstaff calculationsbased on data from OCEI.
3.20 Concentrationat a more disaggregatedlevel generally reflects the trends in Table 3.7. In 1988, 47 percent of consumergoods sectors had concentrationratios of 50 percent or greater, and for producer goods sectors the comparable figure was 59 percent. The greater concentrationin producer goods-which includeheavy industryand capitalgoods-reflects a number of factors. The technologyfor these sectors is more likely to be characterized by increasing returns to scale, leading to more concentratedproduction. However, a number of producer goods sectors were also reserved for public firms, reinforcingthe concentrationin those sectors.
3.21 Concentration at the 4-digit level is shown in Table 3.8. An alternative measure of concentration-the Herfindahl index-is also calculated.2 The average 4plant concentrationratio across all sectors declined between 1975 and 1988 from 57 percent to 52 percent. The Herfindahl index also declined. Using the CR4 ratio, the most concentratedsectors in 1988 included petroleum, alcoholic beverages,tobacco, tires and tubes, and somecapital goods. The least concentratedsectors were apparel, wood furniture, and plastics. The sectors with the greatestfa'' in concentrationbetween 1975 and 1988 were animal feed, synthetics, and motorcycles. The greatest increasesin concentrationwere in knitting mills, metal/woodmachinery. and scientificequipment.
3.22 InternationalComparisons. Table 3.9 shows the average four-plant concentrationin Venezuela compared with other countries with available data. Venezuela's industrial structure is concentratedrelative to Argentina, Brazil, Chile, and the industrializedeconomies of France and the United States. However, the average concentrationis lower than in Colombia, Mexico, or Turkey.
2 TheHerfindahl index is derived by squaringeach plant's share of the market and adding the results for all plants in the sector. A competitivesector, where each firm has a small share, would yield a Herfindahlindex close to zero. A monopolized sector with only one firm would give a Herfindahl index of 1. The estimates in Table 3.8 probably understatethe true Herfindahl. On the one hand, they are calculatedat the plant rather than the firm level, and one firm is likely to own several plants. On the other hand, the smallestfirms are not includedin the data base, so their shareof the market is excluded. If they were included, that would lower the index. (491
Table 3.8: Industrial Concentration by Four-Digit CIIU, 1975-88.
197S 1981 1988 1975-88 Change Herfindahl HerfindHhl Herfindahl HefHindahi Subsector bnd C Ine fk_ CR4 Inail MM Ml PWatst CR4 Index
I FOOD PRODUCTS 1595 45% .078 1911 40% .067 2237 45% .079 642 .0% .001 3111 Meat Preparation 58 36% .052 93 35% .044 88 35% .047 30 -1% -.005 3112 Dairy Products 92 36% .056 103 28% .039 98 32% .045 6 4% -.010 3113 Fruit/VegetableCanning 46 60% .112 49 53% .095 41 64% .117 -5 4% .005 3114 Fish Cnnng 19 60% .121 12 89% .335 14 72% .165 -5 12% .043 3115 Vegetable/Anim Oils 21 66% .137 20 58% .119 15 78% .201 -6 11% .064 3116 Grain Mifl Poductr 95 45% .068 90 42% .060 105 47% .067 10 2% -.001 3117 BakeryProducts 1197 25% .016 1480 20% .016 1804 21% .014 607 -1% -.002 3118 SugarRefining 25 54% .104 30 55% .100 39 49% .090 14 -6% -.014 3119 Confectionery 42 67% .142 34 69% .148 33 73% .160 -9 6% .018
.2FOOD PRODUCTS,N.E.S. 144 63% .157 181 499D .088 201 40% .065 S7 -23% -.091 3121 Food Products,n.e.s. 120 37% .051 149 33% .041 159 31% .036 39 -6% -.015 3122 Animsl 'eed 24 79% .222 32 64% .128 42 44% .081 18 -35% -.142
.3BEVERAGES 1.9 64% .148 129 65% .140 117 66% .143 -12 2% -.005 1131 DistillingSpirits 43 58% .114 45 64% .123 43 72% .164 0 14% .050 3132 Wine Industriea 7 89% .248 5 96% .450 4 100% .352 -3 11% .104 3133 Malt Beverages 8 81% .202 7 84% .190 7 83% .182 .1 2% -.020 3134 SoftDrinks 71 25% .035 72 26% .035 63 28% .041 -8 3% .006
314 TOBACCO 35 97% .547 32 98% .497 37 98% .649 2 1% .102
321 TEXTILES 192 33% .054 202 35% .052 217 34% .057 2S 1% .003 3211 Spinnig,Weaving 113 27% .033 115 29% .033 133 28% .037 20 1% .004 3212 Textiles 32 35% .051 45 36% .044 39 47% .072 7 13% .021 3213 KnittingMils 23 60% .141 19 71% .169 10 83% .249 -13 23% .109 3214 Carpeta,Rugs 8 91% .223 10 66% .116 17 75% .159 9 -16% -.064 3215 Cord and Rope 10 82% .203 7 94% .243 12 85% .198 2 3% -.006 3219 Textiles n.e.s. 6 95% .395 6 93% .314 6 99% .555 0 4% .160
322 APPAREL 622 13% .009 1069 9% .004 955 11% .007 333 -2% -.002
323 LEATHER PRODUICTS 103 57% .154 116 56% .187 113 55% .121 10 -3% -.033 3232 Furs, Dyeing 23 70% .202 20 70% .270 18 64% .150 -5 -5% -.052 3233 Leather Products 80 25% .027 96 33% .052 95 20% .015 15 -5% -.012
324 FOOTWEAR 380 11% .007 696 12% .006 573 17% .013 193 6% .006
331 WOOD PRODUCTS 311 19% .022 336 17% .015 303 19% .017 -8 -1% -.006 3311 SawmiLls 253 17% .016 257 15% .012 245 18% .015 -8 1% -.001 3312 Wood Containen 8 76% .226 5 77% .154 3 59% .200 -S -17% -.026 3319 Wood,Corkn.e.s. 50 33% .049 68 23% .022 55 27% .027 5 -5% -.021
332 WOOD FURNITURE 622 11% .006 749 11% .006 817 13% .007 196 2% .001
'1 PULP,PAPER 93 61% .195 112 55% .105 102 56% .101 9 -6% -.09S 3411 Pulp, Paperboard 22 57% .107 33 55% .100 35 S7% .102 13 0% -.005 3412 PaperConainer 54 51% .096 59 56% .113 57 49% .081 3 -2% -.015 3419 PaperProducts,n.e.s. 17 89% .530 20 51% .090 10 81% .208 -7 -8% -.322
42 PRINTING, PUBLISHING 504 26% .025 700 16% .011 666 17% .016 162 8% -.009 [t501
Table 3.8: IndustrIal Concentration by Four-Digit CIIU, 197548.
1975 1981 1988 1975-88Change Herfindahl Herfindab Herfindshl Herdinihe Subsector Pl1t 11140 aEnlanb& WIndex R ma B Index fl'ls CR4IWe
351 INDUSTRIALCEMICALS 69 65% .187 106 57% .143 102 60% .120 33 -5% -.067 3511 IndustrialChemicals 44 41% .060 60 36% .057 63 44% .083 19 3% .024 3512 Feutilizers/Pesticides 14 74% .258 15 85% .329 12 79% .180 -2 5% -.078 3513 SyntheticPrducts 11 91% .286 27 72% .152 27 59% .110 16 -32% -.176
2 DRUGS, COSMETICS 234 43% .078 253 38% .060 288 40% .064 54 -4% -.013 521 Pints, Vanishes 27 75% .162 28 64% .146 39 73% .153 12 -3% -.009 522 Drugs, Medicines 69 19% .027 75 21% .023 69 22% .031 0 3% .003 3523 Cosmetics 71 47% .080 82 40% .060 83 40% .061 12 -7% -.019 3529 Chemicalsn.e.s. 67 31% .046 68 37% .054 97 35% .047 30 4% .002
353 PETROLEUM REFINIG 17 95% 388 18 92% 325 14 98% 324 -3 3% -.063
354 PETROLEUM PRODUCTS 6 99% .473 18 79% .198 17 71% .1V 11 -28% -.278
355 RUBBERPRODUCTS 75 83% .208 56 83% .276 48 90% .295 -27 8% .087 3551Tre, Tube Industries 45 88% .231 28 93% .328 24 95% .325 -21 7% .094 3559RubberProducts n.e.s. 30 60% .11S 28 42% .077 24 66% .131 -6 6% .016
356 PLASrICPRODUCTS 238 17% .016 390 13% .009 404 14% .012 166 -3% -.004
361 POTrERY, CERAMICS 22 82% .232 35 67% .157 30 77% .234 8 -6% .002
362 GLASS PRODUCTS 56 59% .132 82 45% .074 84 52% .094 28 -6% -.037
369 NONMETALPRODUCTS, n.es. 421 46% .101 S64 42% .077 543 42% .074 122 -4% -.027 3691 StrucuralClay 76 59% .174 87 53% .080 99 53% .089 23 -6% -.085 3692 Cement,Lime 2S 61% .137 32 62% .142 36 54% .120 11 -7% -.017 3699 Non-mel n.e.s. 320 26% .029 445 18% .014 408 22% .020 88 -3% -.009
371 IRON, STEEL, BASIC METALS 98 74% 346 128 68% .265 152 69% .342 5S -5% -.004
372 NON-FERROUSMETALS 57 70% .2C' 69 82% .292 86 81% .246 29 11% .046
-1 FABRICATEDMETAL PROD. 757 33% .043 1233 25% .028 1164 29% .036 407 -4% -.007 3811 Cutlery,Tools 71 33% .050 95 31% .03S 91 32% .038 20 -1% -.012 3812 Metal Furniture/Fixtures 119 20% .020 179 14% .010 165 18% .014 46 -3% -.006 3813 StructuralMetals 467 23% .020 792 17% .011 752 16% .010 285 -7% -.010 3819 FabricatedMetal n.e.s. 100 41% .059 167 34% .046 156 40% .059 56 *% .000
82 NON-ELECT.MACHINERY 149 51% .096 232 38% .052 252 38% .092 103 -13% -.004 3822 AgriculuralMachinery 18 72% .305 26 62% .123 29 52% .091 11 -19% -.214 3823 Metal/WoodMachinery 25 51% .096 12 45% .089 18 91% .680 -7 40% .584 3824 Indurl Machinery 13 73% .180 50 39% .054 49 48% .090 36 -26% -.089 3829 Machineryn.e.s. 93 49% .077 144 37% .049 156 32% .041 63 -16% -.036
83 ELECTRICAL MACHlINERY 164 48% .081 209 42% .065 235 40% .07S 61 -7% -.005 3831 Elec Induddal Machine 48 43% .064 67 33% .043 79 28% .039 31 -15% -.025 3832 Radio, Telecommunications 44 41% .059 49 40% .064 52 39% .060 8 -2% .001 3833 Electrica Appliances 6 88% .221 9 83% .193 10 91% .328 4 3% .106 3839 Elec Machineryn.e.s. 66 52% .094 84 46% .070 94 39% .057 28 -14% -.037 [51J
Table 3.8: Industrial Concentration by Four-Digit CIIU, 197548.
1975 1981 1988 1975-88 Change Herf Herfindab Herfind Herfindah Subctor &lab CR4 Ignde Pbn M4 Index Plbnt CR4 lfidx CRaindeOA TRANSPORTEQUIPMENT 166 67% .145 248 65% .136 265 56% .098 99 -12% -.047 -I ShipBuilding 14 82% .274 19 77% .299 17 73% .175 3 -10% -.099 -Ralway Equipmnet 2 100% .504 MotorVehicle 139 67% .143 212 65% .132 226 55% .097 87 -12% -.047 Motorcycles 7 96% .478 9 81% .416 13 58% .12e 6 -38% -.3S8 . TransportEquipn.e.s. 6 88% .2S3 6 88% .504 9 71% .162 3 -17% -.091 SCIENTIFICEQUIPMENT 31 53% .144 41 75% .303 47 67% .196 16 14% .052 -I ScientificEquipmenlt 22 44% .079 31 75% .31S 35 67% .205 13 24% .126 2 Photo/OpticalEquipnent 9 7S% .298 10 79% .218 12 64% .157 3 -11% -.141 OTHERMANUFACTURING 140 39% .059 177 26% .027 173 31% .041 33 -8% -.018 leweky 26 48% .077 40 19% .012 32 34% .040 6 -14% -.038 MusicalInsuments 1 100%1.000 1 100% 1.000 0% .000\ 3903 SporingGoods 10 87% .269 8 71% .156 8 64% .112 -2 -23% -.157 3909 OtherManufacturing n.e... 104 32% .035 128 28% .030 132 29% .038 29 -3% .004 TOTALMANUFACTURING 7433 57% .161 10085 54% .141 10t43 52% .127 2810 -5% -.034
Notes: ia: 1988-1981change. CR4 is calculatedas the proportionof productionby the top four firms in each CIIU group. Hefuridahiindex calculated as: i = Sum x, where:xt = outputof plant i as a shareof outputof industryj. H; is a mnasureof dispersionin plart sizesin industy j. It reachasits lowestvalue when all plants are the same size. 3-DigitCR4 calculatedas production-weightedaverage of 4-digitCR4's. 3-DigitHerfindah index calculatedas production-weightedaverage of 4-digit HerfindahlIndices. Total Manufactuangindices calculated an production-weightedaverages of 4-digit CR4's and HcrfindahiIndices.
Table 3.9: Concentration of Production: International Comparisons.
Countrv Year CR4 Countr Year CR4
Venezuela 1988 S2% Argentina 1984 43% Brazil 1980 51 Chile 1979 50 Colombia 1984 62 Indonesia 1985 S6 Mexico 1972 73 Turkey 1976 67 United States 1972 40 France 1969 28
Source: Venezula: WorldBank staff calculationsbased on data fromOCEI; Colombia:World Bank (1989); 'CompetitionPolicies," C. Frischtak,MENIN, World Bank. [52 1 3.23 Anotherinteresting comparison is with Japan where, in 1963, 19 percent of the industrial sectors had four-plantconcentration ratios greater than 60 percent, comparedto more than 40 percent of Venezuelansectors in 1988. While only 11 percent of Venezuelansectors had concentrationless than 20 percent in 1988, in Japan in 1963 one-thirdof the sectors were in this category. The lower Japanese concentrationin 1963 was possible because of the size of the domestic market and the large share of exports of many industries.
3.24 Fragmentationof Production. Althoughthe manufacturingsector has high concentration, production levels in some sectors are below efficient scales. In the automotiveindustry, there are 15 assemblers in a market which peaked at 163,000 units in 1982 and fell to 26,000 units in 1989. Since production should be at least 100,000 units to exploit economies of scale, auto assembly cannot be efficient by internationalstandards without exports. The sector's profits derived from a ban on imports and preferential exchange rates for inputs until 1989. Legislation in 1985 attempted to rationalize productionthrough: (1) prohibitingentrants; (2) restrictingnew models;(3) imposingminimum production levels; and (4) raising the percentageof domesticallyproduced components in assembledvehicles. This approach further reduced competitionin a market already protected from import rivalry, limited the flexibility to respond to changing demand conditions, raised production costs, and further reduced internationalcompetitiveness by mandatingdomestic contentrules.
3.25 As part of the 1989 trade reform, quotas were removed on models produced in Venezuela, and import prohibitionswere replaced by an 80 percent tariff, which has been reduced to 50 percent and will be reduced in line with the tariff reforms. Models not produced in Venezuelawill be subjectedto luxury taxes of 70 percent above the base tariff. As an interim protective measure, the government continuedto grant tariff exonerationson CKD kits. To allow effective competitionwith imports, the governmentshould minimizedomestic contentregulations and allow free entry and exit in the sector. Althoughfree entry in a protectedenvironment can lead to plants with suboptimallevels of production, free entry in conjunctionwith import competitionwould act to rationalize the sector.
3.26 Assessment. Concentrationand plant size in Venezuelaare likely to reflect a combination of factors including (1) technologicalrequirements of industries; (2) size of domestic markets; (3) the economy's general inward orientation; (4) policies to restrict entry; and (5) lack of an anti-trust mechanismto regulate market structure or behavior. In referenceto (1), Naim (1984) suggeststhat one factor leadingto concentratedmarkets is the large-scalerequirements of the importedtechnology in most industries. In regard to (2) both Naim (1984) and Meller (1978) noted the importanceof small domestic markets in determining concentrationin Latin America. Meller (1978) found that concentrationwas inversely related to market size. However, economiesof scale could be achieved in small domestic markets through expandedexport production. The anti-exportbias, in conjunctionwith small domestic markets, have jointly limited the scope for entry and expansion.
3.27 Industrial policies have also contributedto concentration. Restrictionson private entry into key sectors such as aluminumand steel are one factor which explains the higher concentrationin producer goods sectors. Investmentlicenses, which gave special incentives,were not awarded to firms in sectors with "adequate"supply. In addition, exchangeallocations and other benefi:3 were generally awarded on the basis of output, protectingthe share of incumbents. Finally, as pointed out by Naim (1984), the combinationof few firms and easy credit made it more attractivefor firms to acquire existing plants than build new ones. Unfortunately,since the data from OCEI are at the plant- and not at the firm-level, it is not possible to measure the effects of mergers on market share and concentration. The lack of an anti-trust mechanismfor regulatingbehavior encouragesconcentration of ownership. 1 53 1
Table 3.10: Distribution of ?'lants by Age, 1975-1988. t
Aee (Years) 1975 1977 1979 1981 1984 1986 1988
0-2 6% 6% 5% 3% 3% 2% 2% 3-5 10 12 9 9 5 5 4 6-10 22 19 20 20 18 14 11 11-20 39 39 39 32 34 34 38 Over 20 24 25 28 36 39 45 45
Number of Plants 1112 1297 1407 1236 1338 1436 1562
Average Age t 20 21 20 24 25 26 26
Notes: t AUplants with morethan 50 employees. t Weightedby sales. Source: World Bankstaff calculationsbased on data from OCEI.
3.28 The issue is not concentration,per se, but whether concentrationpermits anti-competitive behavior. Where a concentratedmarket faces import competitionor the threat of domesticentry, there may be no market power. Concentrationdoes not necessarilyreduce economic welfare, particularly where it permits the exploitationof economiesof scale. Both in concentrateddomestic markets and the contrastingcase of fragmentedproduction, pressure from imports can serve a dual function of providing competitionand the necessary impetus towards consolidationof production. Complementarydomestic regulatorymeasures, however, may also be necessary. Consolidationof production cannot occur without relativelyeasy exit and bankruptcypolicies.
3.1.2 Market Structure and Behavior
3.29 This section examines the relationship between market structure and the behavior of manufacturingestablishments. The statisticalcorrelation between concentrationand various measuresof behavior (price-costmargins, export orientation) is examined. Entry and exit are examined indirectly through evidenceon the age of firms.
3.30 Age of plan. The averageage of plants with over 50 employeesincreased between 1975 and 1988 (Table 3.10).3 In 1975, 16 percent were under 6 years. In 1988, only 6 percent of the plants were under 6 years, and between 1975 and 1988 plants over twenty years increased from 24 percent to 45 percent. The increasingaverage age reflects a fall in entrants as well as the survival of incumbents. The percentage of new plants (ages 0 to 2) declined rapidly after 1981. The decline is probably a consequenceof the adverse macroeconomicframework, larger investmentsin the 1970s, an increase in entry barriers, and the generally unfavorableinvestment climate during the 1980.
'Plants with fewer than 50 employeesweru excludedfrom Table 3.10 to avoid shifts in the age distributiondue to changes in sample size which could arise from OCEI's practice of includingin the survey all plants with over 50 employeesbut only a sampleof those with fewer employees. [54 1
Table 3.11: Price-Cost Margins by Degree of Ce *centration.
Four-Plant Average Price-Cost Margin: Concentration Ratio 1975 1978 1982 1984 1988
76% - 100% 33% 31% 30% 33% 28% 51% - 75% 31 29 30 28 28 26% - 50% 28 27 27 26 27
Concentmationbased on 4-plant concentration ratio in 1981. Source: World Bank staff calculations based on OCEI data.
3.1.2.1 Concentrationand Price-Cost Margins
3.31 Concentrationis not necessarilyassociated with oligopolisticbehavior, although studies have generallyfound a relation. This section examinesthe correlation between concentrationand price- cost margins, a common measureof marketpower. Price-costmargins are the differencebetween output prices and average variable costs. If firms behave competitivelyand incur no fixed costs, price would equal variable cost and the price-costmargin would be zero. If firms have fixed costs which are equal on a per-unit basis, they would also have equal price-costmargins. In such a market, there would be no correlation between concentration and price-cost margins. Thus correlation between margins and concentrationmay result from market power.
3.32 Price-cost margins can be approximatedby subtractingexpenditures on variable inputs from total revenue, and expressingthis differenceas a proportionof total revenue. If there were no fixed costs, this would be equivalentto plant profits as a proportion of total revenue. However, since firms pay fixed costs, margins are equal to profits plus paymentto fixed factors as a proportion of revenue. In fact, margins would be expectedto vary not only with plant profits but also to pay for fixed factors (such as capital), so these correlations should be regarded with caution, since there may also be an associationbetween high margins and greater capital intensity.
3.33 Price-cost Margins. Table 3.11 shows the average price-costmargins over 1975-1988, groupedby concentration. The four-plantconcentration ratio in 1981 is used to classify firms. The data show a positivecorrelation between concentration and price-cost margins, particularly in the earlier years. In 1975, the average margin for sectors with low concentrationwas 28 percent, compared to 33 percent for concentratedsectors. Between 1975and 1988the differencenarrowed and margins declined. Several factors could explain this trend, includingprice controls, trade policies, or demand conditions.
3.34 Price-cost margins at the 3-digit ISIC level are shown in Annex Table A.2.2 for 1975, 1981 and 1988. Average margins fell from 31 percent in 1975 to 29 percent in 1988. The largest declines were in leather, refining, and glass. The largest increasewas in tobacco. The sectors with the highest margins in 1988 were tobacco, alcoholicbeverages, refining, and ceramics. The sectors with the lowestniargins were food, leatherproducts, and transportequipment. Significantdifferences in price-cost [55 I margins have persisted. In 1975, as in 1988, tobacco, alcoholicbeverages, and refining had the highest margins.
3.35 Annex Table A.2.3 compares price-ost margins in Venezuela in 1985 with margins in Chile and Colombia. On average, Venezuelanmargins were slightlylower than in Chile and 50 percent higher than in Colombia,but these differencescould result from many factors. Venezuelanmargins were significantlyhigher for beverages,tobacco, refining, ceramics, and nonelectricmachinery. Margins were lower for scientific equipment,wood, printing and glass products.
3.1.2.2 Price-Cost Margins, Concentration,Import Competitionand Export Orientation
3.36 This section discussesthe statisticalcorrelation between price-costmargins, concentration, import competition,and export orientation. A perfect positivecorrelation between two variables would equal 1; no correlation yields a coefficientclose to zero. A negative correlationbetween two variables would give a value between0 and -1. These correlationsshould be treated with caution, since it is not possible to determine the direction of causationbetween two variables, nor whether the correlation is actually causedby some third factor. Further, concentrationand margins are functionsof each other so there may be bias in the estimates.
3.37 The top half of Table 3.12 reportsthe correlationcoefficients for concentration(as measured by the Herfindahl index), price-costmargins, importpenetration and export shares. The correlation in 1975 and 1986 between concentration and margins is +.50, and is statistically significant at the 95 percent level. In addition, correlation rose between 1975 and 1986. Not only do concentrated industrieshave higher price-costmargins, but the relationshipstrengthened over time.
3.38 If importsare a competitiveforce, we would expecta negativecorrelation between imports and margins. Although the correlation is negative for both years, it is not statistically significant. Importsmay not have been sufficientlyhigh to disciplinemanufacturers since, by governmentpolicy, they were allowedonly with the consentof local producersof competingproducts. Anotherpossibdlity is that we cannot separatethe (negative)impact of importson margins from the (positive)impact of margins on imports. High marginsmay attract importsand reverse or dampen the negativecorrelation if trade policy permits.
3.39 Table 3.12 also shows the correlationbetween exports, measured as a percentageof sales, and other variables. The correlation between export shares and import penetration was statistically significant in both 1975 and 1986. This may reflect the importance either of imported inputs for exportersor of import competitionto stimulateinternationally competitive production. Further research would be necessary to identify the direction of causation. Table 3.12 also shows that the correlation between concentrationand export share was significantin 1986 (but not in 1975).
3.40 The bottom half of Table 3.12 sbows the correlation between import restrictions and concentration,margins, and export shares in 1988. The only significant(negative) correlation is between export shares and import restrictions. Since export orientation and import penetration are significantly correlated, it is not surprising that the correlationbetween export shares and restrictions is negative.
3.41 Assessme. Concentrationaffected fims' pricing behavior. There is a significant,positive relation between one measure of concentrationand price-costmargins margins during 1975-88. Import competition,which could be the chief element of market discipline in a small economy, does not seem [561 to have affectedfirms' behavior. Investmentin new plants has declined, as indicatedby the average age of plants. Finally, export share is correlated with both import penetration and concentration and is negativelycorrelated with protection.
Table 3.12: Correlation CoeMdents for Selected Variables.
Price-Cost Import Export Margin Penetration Share 1975 1986 1975 1986 1975 1986
HerfindahlIndex .45* .50* .15 .04 .21 .36* (72) (74) (70) (72) (70) (72)
Price-CostMargin -.12 -.08 -.08 .16 (70) (72) (70 (72)
Import Penetration .54* 41* (70) (72)
Correlation Between Import Restrictions and Selected Variables, 1988.
Herfindahl PriceCost Concentration Export Indc Marain Ratio Share
Import Restrictions -.09 -1A -.02 -.24*
Notes: Correlationsfor 1975and 1986at 3-digitISIC level; correlationsfor 1988 at 4-digit level with 73 obsevations. * indicatesstatistical significance at 95% level. Numbersin ( ) indicateobservations. Import Restrictions meawred by the shae of productionunder licensesor prohibitionsin each category. Source:World Banksaff calculationsbased on data from OCEI, BCV.
3.42 The correlationbetween exports and concentrationsuggests that economiesof scale (as in steel) have been important for exporting firms. Any future anti-trust provisions which seek to maximizedomestic competitionmust take into account the importanceof economiesof scale both for efficientoutput levels in the domesticmarket and for export expansion. One approach is to foster import competition,which controls marketpower withoutexcessive domestic entry. A complementarysolution is to create an environmentmore conduciveto export activity which would allow economiesof scale and simultaneouslyincrease the number of firms. These solutions-implicit in the Government's trade reforms-are in fact one: a firm capableof competingdomestically against imports should also be capable of export rivalry abroad. (57 1
Table 3.13: Growth Rates of Manufacturing Value-Added by Subsector, 1975-88.
1975-79 1979-83 1983-88 1975-88
Tot.tl 8.3% 'L.4% 1.6% 3.9%
Non-Durable Consumer Goods 5.8 4.2 1.0 3.4 Food 4.4 5.6 -0.9 2.7 Other Food Products 9.3 1.8 14.8 9.0 Beverages 12.7 8.0 .3 6.4 Tobacco 16.1 .0 - .5 4.5 Textiles, Clothing, Leather 3.4 1.6 2.1 2.3
Consumer Durables and Intermnediates 8.7 2.1 1.8 4.0 Wood Industries & Furniture 4.0 -1.1 -5.4 -1.3 Paper Products& Printing 7.4 -1.3 1.0 2.2 Chemicals & Rubber Products 14.2 .3 3.8 5.8 Non-Metal Mineral Products 8.1 -1.0 3.9 3.6 Basic Metals 5.9 9.2 -0.9 4.2
Capital Goods 13.5 -C.3 2.3 4.8 Machinery& Equipment 18.4 .0 3.2 7.0 Transport Equipment 6.2 -3.0 -.1 .9
Other Industries 3.1 -2.4 11.2 4.4
Note: Growth rates calculated using beginning- and end-of-period values, with growth between periods t and t - n equal to ([VA,1VA,j" - 1)*100. Source: World Bank staff calculations based on data from OCEI.
3.1.3 Performance
3.43 This section reviews the performanceof manufacturingfirms over 1975-1988. Growth of value-added,particularly in sectors dominatedby public enterprises, was achieved through increases in employmentand investment. Productivitygrowth was low or negative, reflecting the inefficiencyof the developmentstrategy. Othermeasures of performance,including exports and capacityutilization, also reveal scope for greater efficiency.
3.1.3.1 Growth in ManufacturingValue-Added
3.44 Real growth in non-petroleummanufacturing value-added averaged 3.9 percent between 1975 and 1988 (Table 3.13). Followinglarge public investmentsand a booming domestic market in petrochemicals, fertilizer, and steel, growth rates were highest in the 1970s, averaging 8.3 percent between 1975 and 1979. Figure 3.2 shows that investmentduring the 1970s was concentratedin basic [581
Fligure 3.2: Real Investment in Manufacturing, 197688.
Billions of 1968 Bolivares 5
4-
3
2-
0 1978 19179 19182 1983 1984 1985 1986 1988
LiFood/Bev/Tob= Textiles LiWood/Paper Chemnicala/Petrol IlNon-Metal1 D asic Metals Metal/Mach 1Ul1OtherMfg
metals(steel,aluminum) and petrochemicals.'Following cuts in governmentspending and the recession in 1979-83,growth invalue-added slowed to 2.4 percentannually. The mostnegatively affected sectors weretransport equipment, wood, and paperproducts. Growthof value-addedfell furtherafter 1983, averaging 1.6 percent through 1988.1 Reducedinvestment in the mid-1980and macroeconomic instabilityand recessionreduced the growthrates. Over 1975-88,the sectorswith the highestrates were chemicals,some food products,and capitalgoods (downstream metal products, electrical machinery). Sectorswith the lowestrates werewood products and transportequipment (see AnnexTable A.2.4).
'Real investmentwas caculate by dividinggross investmentby the GNP deflator.
'With controlledprices, multipleexchange rates, and impoit controls, value-addedmay differ from value-addedmeasured in world prices. After the 1983 devaluation,the prices of impoftedraw material probablymoved closer to world prices, since the exchangerate had been overvalued. Thin impliesthat value-addedmay have been over-estimatedprior to the devaluation, and it could accountfor some of the perceivedfall in growthof value-addedafter 1983. However,the analysisis complicated by price controls, tariffs, and quotaswhich varied over the period. In addition, the impactof price diatortionson growh in value-dded would depend on changes in the policy regimne,and the direcion of the bias is difficultto determine. 1 59 1
Table 3.14: Labor Productivity Growth, 1975-1988.
1975-79 1979-83 1983-88 1975-88
311 Food Products -3.0% 5.5% -3.6% - .7% 312 FoodProducts, n. c. s. 2.4 .9 8.4 4.2 313 Beverages 1.8 6.7 1.2 3.1 314 Tobacco 5.9 4.9 .4 3.4 321 Textiles -5.3 6.8 -3.3 -1.0 322 Apparel -4.7 6.8 .1 .6 323 Leather Products -2.0 0.3 -3.7 -2.0 324 Footwear 4.7 7.3 -4.1 2.0 331 Wood Products -2.1 2.4 -5.6 -2.1 332 Wood Furniture .6 3.7 -5.2 - .8 341 Pulp, Paper -5.2 4.8 .2 - .3 342 Printing 4.1 - .3 -3.8 - .3 351 IndustrialChemicals 2.3 7.3 -1.3 2.4 352 Drugs, Cosmetics 4.3 -1.7 1.9 1.5 354 Petroleum,Coal -6.2 6.7 -12.7 -5.1 355 Rubber Products -3.0 13.9 7.9 6.2 356 Plastic Products 2.4 - .6 -1.7 - .1 361 Pottery, Ceramics 3.5 1.4 -2.9 .4 362 Glass Products -1.4 .3 1.5 .2 369 NonmetallicProd. -4.5 6.5 - .8 .2 371 Iron, steel -11.2 8.0 -3.2 -2.5 372 Non-FerrousMetals -8.5 2.4 -6.9 -4.7 381 FabricatedMetal Prod. 4.5 5.9 .3 .3 382 NonelectricMachinery -1.7 4.4 -2.5 - .2 383 ElectricalMachinery 1.2 10.0 1.8 4.1 384 Transport Equipment -3.6 3.4 -1.6 - .7 385 ScientificEquipment 13.0 7.9 -6.8 3.4 390 Other Manufacturing -1.5 1.6 1.0 .4
Publc Eot. (354, 371, 372) -9.2 6.8 4.1 -2.5 Subtotal(w/o Publi Ent.) 0.4 4.7 -1.0 .9
TOTAL (Al Sectors) -1.1% 5.2% -1.4% .7%
Note: Growthcalulated as in Table 3.13. Labor productivitygrwth is meured by the changein real value-addedper employee. Value-addedis calculaed with OCEI's definiton (mntrial wbutcted fiwn gtos output),ad price deflator for 4-digit sectorsare ued to deriveea values. Soure: World Banksaff calculationsbased on data fromnOCEI.
.3.2 Labor Productivity
5 Productivity,measured by the increasein real value-addedper employee,grew an average percent annually between 1975 and 1988 (Table 3.14). Ihis was low internationally: Growth in 1601 Korea averaged nine percent over 1970-86;in Argentinaand Mexico it was 2.7 percent and 1.9 percent respectively. The Venezuelansectors with higheGtlabor productivitygrowth includedrubber products, electrical machinery, scientificequipment, and some food products. The sectors with the lowest growth includedpetroleum products, steel, and aluminum,which averaged -2.5 percent. Excludingthese sectors, average growth was .9 percent during 1975-88.
Table 3.15: Gross Investment as a Percentage of Value-Added, 1976-88. t
Sector 1976-79 1982-88 1976-88
31 Food, Beverages 15% 10% 12% 32 Textiles, Leather 12 10 11 33 Wood, Wood Products 10 7 9 34 Paper, Products 18 11 14 35 Chemicals 52 27 36 36 Non-metallicMinerals 26 14 18 37 BasicMetals 183 49 98 38 Metal Prod, Machinery 17 12 14 39 Other Manufacturing 7 9 8
AVERAGE 40% 19% 26%
Note: t Pecmentagescalculated as averages from anmnaldata, equal to gross investmentin each sector dividedby value-added.Sectoral values were aggregatedfrom plant-lvvl data. Data were not availablefor 1975, 1980, 1981. Soure: World Bank saff calculationsbased on data from OCEI.
3.46 The averages for 1975-88mask swingsduring the period. Between 1975 and 1979, when investmentsfrom petroleum earnings led to increasedemployment, productivity grew at -1.1 percent. The worst performers were textiles, apparel, paper, petroleum products, steel, and aluminum-the last three of which were dominated bv public enterprises. Between 1979 and 1983, productivity growth averaged 5.2 percent. Faced with a slowdown in the economy, firims reduced their labor force and increasedoutput per worker (see Annex Table A.2.6). Since 1983, productivityagain declined at a rate of 1.4 percent.
3.47 Table 3.14 shows significantsectoral differences. Averagerates ranged from -4.7 percent for non-ferrousmetals (aluminurn)to +6.2 percent for rubber. Nishimizuand Page (1989) found that more-developedeconomies are generally characterized by lower sectoral dispersion of productivity. Resources should be attracted to high productivity to eliminate differentials.6 Nishimizu and Page suggestthat the higher variance of productivitygrowth with decliningper capita incomeis consistentwith greater importanceof structural impedimentsto resource mobility in developingcountries.
6Nishimizuand Page (1989)focus on total factorproductivity, while this sectionrefers to labor productivity. However,they note that similar patterns appear for output and input growth rates. [ 611 3.48 In Venezuela,intersectoral differences are likely to reflect: (1) restrictionson labor mobility;(2) public enterprise monopolies; (3) directed credit and investmenttargeting; and (4)disparate trade protection. Productivitygrowth was lowerwhere public enterprises were dominant. They have generallybeen protected from import competition and fromprivate investment, eliminating incentives for efficiency.Before the 1989reforms, basic metals had highprotection (Tables 2.5A-2.7A). Other sectors withhigh protection,such as wood furnitureand consumerproducts (food, textiles) also had reduced productivityover 1975-88. 3.1.3.3 Productivityof Investment
3.49 To estimateaccurately the productivityof investmentwould require data on real capital stock and its contributionto output. However,Figure 3.2 and Table 3.15 give some indicationsof investmentproductivity. Over two-thirdsof investmentduring 1975-88was in basic metals and chemicals. The ratio of investmentto value-addedbetween 1976 and 1979in basic metalsaveraged 183percent, and over 1976-88,the ratio wasnearly 100percent. Yet growthof value-addedwas higher in othersectors (Table 3.13), including capital goods and beverages, which had lowerrates of investment.
Table 3.16: Compositionof ManufacturedExports, 1981-88.
1981 1985 1987 1988
31 Food, Bverages,Tobacco 1% 1% 1% 1% 32 Textiles, Leather 0 0 1 1 33 Wood, Cork Products 0 0 0 0 34 Paper, Printing 0 1 1 1 35 Chemicals,Petrol., Coal 84 69 64 65 36 NonmetalMinerals 0 2 2 1 37 Basic Metal Industries 13 22 24 25 38 Metal Products, Machinery 2 5 7 7 39 Other Manufacturing 0 0 0 0
Source: OCEI.
3.1.3.4 Compositionof Exportsand ExportPerformance 3.50 Incentivesfor non-traditional exports had little effect during 1975-88, and the appreciation of the real exchangerate in the late 1970sand early 1980 contributedto the economy'sinward orientation.However, the depreciationbeginning in 1983appears to be correlatedwith increased exports. 3.51 Exportincentives. An incentiveprogram for non-traditionalexports was establishedin 1973to reducethe anti-exportbias and encourageexport diversification (See section 2.1.2). The main incentivehas been a tax-freeexport subsidy, applied as a percentageof the exportprice. Under the multipleexchange rate system,non-traditional exporters also had a currencyretention scheme (1983-86) to exchangea percentageof their receiptsat the parallelrate. Non-traditionalexporters have also [62 1 benefittedfrom subsidized credit through FINEXPO, the ExportFinancing Fund and, beginning in 1987, priorityallocation of foreignexchange for inputsused in non-traditionalexports.
Figure 3.3: Non-TraditionalExports and the Real EffectlveExchange Rate.
Millions of USS REER (1973=100) 1400 -
1200_ < 2 00
1000 80°0 - 1/50lo
1975 8 976177 1078 107 1980 101 108 10 1t" 185 10 10987
: -xpowa -* RER
Note: Excludespetrolcum, iron, coffee, cocoa;REER includesexport sibsidies. Source: Export., BCV; REER, World Bank Staff cdcultons.
3.52 Exchangerate changes. Figure 3.3 showsthe real exchangerate for exportersand the value of non-traditionalexports over 1975-87. The real exchangerate w3s calculatedusing the dollar/bolivarrates receivedby exportersincluding the valueof exportsubsidies. From 1975to 1979, the currencyappreciated slightly in real terms, acceleratingbetween 1979 and 1982 when the real effectiveexchange rate appreciatedby 35 percent and non-traditionalexports fell. In 1983, the Governmentcould no longersupport the overvaluedbolivar, and the real exchangerate continuedto depreciateuntil 1986. In dollarterms, non-traditional exports almost tripled between 1982 and 1986. Between1986 and 1987,the currencyagain appreciated. 3.53 Compositionof Exports. Sincethe 1920s,Venezuela's exports have been concentrated in oil. In 1930,oil accountedfor 83 percentof exports. In 1981,petroleum accounted for 95 percent of exportsand refiningfor over 80 percentof manufacturedexports. The patternof manufactured exportsin the 1980was evenmore concentrated than that of value-added(Table 3.16). During1981-88, chemicalsand steel productsaccounted for 89 to 97 percentof manufacturedexports. However,there has been some diversificationaway from refining. The share of steel and aluminumincreased from 13 percentof manufacturedexports in 1981to 25 percentin 1988--inpart due to the fall in petroleum prices. (631
Table 3.17: Types of Manufactured Exports, 1981-1988. (ExcludesRefining and Basic Metals)
1981 nu8 1987 1988
Non-Durable Consumer Goods 35% 12% 12% 9% Food 33 10 7 6 Textiles, Clothing,Leather 2 2 5 4
Consumer Durables, Intermediates 27 48 43 42 Paper, Printing 7 7 8 9 ChemicalProducts 18 28 24 26 Non-MetalMinerals 2 14 10 7
Capital Goods 38 40 45 48 FabricatedMetal Products 20 25 31 26 Transport Equipment 10 2 4 9 Other Machineryand Equipment 8 13 10 14
Other Industries 0 0 1 0
Source: OCEI.
3.54 When petroleumrefining and basic metalsare excluded, the remainingexports are spread over several groups (Table 3.17). Approximately50 percent are chemicals (fertilizers) and fabricated metals (steel rods, etc). Althoughin 1981 processedfoods composedover 30 percent, this sector's share fell to less than 6 percent by 1988. Following 1983, when balance of payments problems led to restrictive exchange and import policies, export licensing was increased from 30 to 115 product categories. Licensing was imposed primarily on price-controlledagricultural and processed goods, leading to a fall in both the volume and share of food exports.
3.55 Share and Growth of Non-traditional Exports. Growth of non-traditional exports generally followed(with a lag) changes in the exchangerate (Figure 3 and Table 3.18). Non-traditional exports increased between 1975 and 1981, primarily in steel and aluminum. Exports fell in the early 1980 and then revived in 1983.
3.56 Table 3.18 divides exports into traditional and non-traditional.The share of traditional exports (petroleum, iron ore, coffee and cocoa' fell from 95 percent in 1975 to 87 percent in 1987. Although traditional exports fell nearly 50 percent between 1981 and 1987, non-traditionalexports increasedover 30 percent. Increases in manufacturedexports were primarily in chemicals, steel, and aluminum. [641
Table 3.18: Value of Exports, 1975-87. (USS, Millions)
1975 1977 1979 1981 1983 1984 1985 1986 1987
Traditional ExDortS 8,713 9,367 13,870 19,283 14,063 15,029 13,215 7,833 9,213 PetroleumProducts 8,412 9,137 13,673 19,094 13,966 14,911 13,063 7,649 9,054 Iron Ore 266 166 139 168 80 81 108 109 118 Coffee 19 28 25 3 4 22 27 58 24 Cocoa 16 36 33 18 13 15 17 17 17
Non-traditional Exports 158 192 464 874 568 1,045 1,329 1,297 1,354 Food Products 47 31 37 43 70 100 139 149 52 Beveragesand Tobacco 2 3 2 14 8 11 13 20 16 Crude Materials 4 5 12 14 12 14 9 9 7 ChemicalProducts 40 73 105 119 52 169 170 177 190 Capital Goods 8 9 24 70 36 24 35 67 53 Other Manufactures 57 71 285 614 391 725 963 874 986 Misc. Products 0 0 0 0 0 2 0 1 3
TOTAL 8,871 9,559 14,334 20,157 14,631 16,074 14,544 9,130 10,567
Source: BCV, AnuarioEstadistico del SectorExoortador No Tradicional,1988.
3.57 Export Orientation. Excludingrefining, steel, and aluminum,the share of exportsin total sales was less than three percent during 1981-1988 (Table 3.19). Following the exchange retention scheme in 1984 and the real depreciation, private exports rose from .9 percent of sales in 1981 to 2.7 percent in 1985. However, in late 1986 currency retention was eliminatedand the exchange rate began to appreciate. Private exports fell to 2.2 percent of sales in 1988. However, it is impossibleto separateexchange rate changesfrom fluctuationsin domesticdemand. Low domesticdemand in the mid- 1980 and partial recovery probably account for part of the increase and subsequent decline in export orientation.
3.58 The low share of exports suggests that incentives had a minimal impact on inwardly- oriented firms. Apart from steel and aluminum,the increases in export shares have been insignificant. The combinedeffects of the export subsidy, subsidized credit, and the preferential foreign exchange system were not sufficientto raise exports above 3 percent of sales. The only factors associatedwith a response were the currency retention schemeand the real exchangerate depreciation. The limitedexport response during 1980-88 suggests the difficulties in overcoming the anti-export bias created through protection and an over-valuedexchange rate. Venezuelanexport orientation is comparedto Chile's and Colombia's in Annex Table A.2.5. [651
Table 3.19: Export Orientation by Subsector. (Percentageof Salesin Expoit Market)
I2I 198S 1987 1988
311 Food Products 1% 1% 1% 0% 312 Food Products, n.e.s 0 0 0 0 313 Beverages 0 *0 0 0 314 Tobacco 1 5 3 2 321 Textiles 1 1 2 1 322 Apparel 0 0 1 0 323 Leather 0 0 0 0 324 Shoes 0 0 1 1 331 Wood 0 0 0 0 332 Wood Furniture 0 0 0 0 341 Paper 1 4 5 5 342 Printing 0 0 1 1 351 ChemicalProducts 3 13 10 10 352 Drug, Cosmetics 0 0 1 0 353 Petrol, Refining 70 63 63 74 354 Petrol, Coal Products 1 11 1 5 355 Rubber 0 0 0 0 356 Plastic 0 1 1 1 361 Ceramics 0 4 2 6 362 Glass 0 1 4 2 369 Other non-metallicMinerals 0 11 6 4 371 Iron, Steel 11 28 18 16 372 Non-ferrousMetals 53 52 42 49 381 FabricatedMetal Prod. 3 12 14 10 382 NonelecMachinery 2 2 1 1 383 ElectricMachinery 0 8 6 6 384 Transport Equipment 1 1 1 2 385 ScientificEquipment 1 0 0 1 390 Other Manufacturing 0 0 2 0
TOTAL (Less 3S3, 37) 1 3 3 2 TOTAL 15% 17% 13% 13%
Source: OCEI. [66J
Table3.20: Capadty Utilization,198488.
1984 198 1986 1987 1988
Enterprie8with more than 100 employees 59% 59% 62% 63% 62% Enterpriseswith less than 100 employees 41% 40% 42% 48% 49% All enterprises 57% 57% 60% 62% 62%
Source: "CapacidadUtliza a en la IndustriaManufacturera Fabril 1984-88"OCEI, 1990.
Table3.21: FactorsAffecting Capacity Utilization, 198488.
Factor 194 1985 1986 1987 1988
Lack of administrativepersonnel 0% 1% 1% 1% 1% Lack of technicalpersonnel 9 9 9 12 9 Lack of qualifiedworkers 16 14 IS 19 20 Low demand 69 63 45 34 34 Competitionfrom imports 17 1S 11 8 6 Shortage of domesticraw materials 31 33 47 52 53 Shortageof importedraw materials 39 44 58 56 57 Shortageof working capital 24 22 21 20 26 High labor zosts for overtime 9 10 11 10 11 Other 13 12 9 13 12
Source: "CapacidadUtilizada en la IndustriaManufactumem Fabril, 198488".
3.1.3.5 Capacity Utilization
3.59 Capacity utilization rose from 57 percent in 1984 to 61 percent in 1988 (Table 3.20). Jncreased utilization is due primarily to higher demand between 1983 and 1988, fueled through the devaluation and import restrictions. However, average utilization remained low, with 40 percent of capacity idle.
3.60 The factors reported by firms as affecting capacity utilizationare listed in Table 3.21. In 1984, insufficientdemand was the most importantconstraint. In 1988, the most importantfactors were importedanC' domestically-produced inputs. These difficultieswere the deliberateresult of the restrictive trade policiesfollowing the 1983balance-of-payments crisis. They may also reflect the problemsof firms [67 1 which obtain inputs from state-owned enterprises. The two other important factors which reduced capacity utilization in 1988 were low demand and working capital.
3.1.4 Assessmn
3.61 Section 3.1 has examinedthe structure and performanceof the manufacturingsector and found that 1975-88was characterizedby inefficientgrowth of output. Large investments,financed by oil revenues, were directed to steel, aluminum, and petrochemicals. Manu,acturinggrowth, which averaged eight percent during the late 1970s, fell below two percent in the mid 1980s. Inefficiencyis evident in low growth of labor productivityor-in sectors dominatedby p',blic enterprises-declines in the rates of output per worker. Other signs of inefficiencyinclude high ratios of investmentto value- added in public enterprises, low rates of capacityutilization, and the manufacturingsector's inabilityto compete internationally.
3.62 Industrial and trade policies discouraged competitionand contributed to the sector's structure, behavior, and performance. Private investmentwas prohibitedin sectors reservedto the public enterprises. Industrial incentiveswere selectivelygranted with the goal of discouraging competitionby denying them in sectors where supply was perceivedadequate by governmentofficials. Despite output growth and significantnumbers of firms, the concentrationof output in several large plants continuedin the 1970s and 1980. Import protection via tariffs, quotas, and exchange allocations further limited competition. There was a significant relationship between concentrationand price-cost margins, but import penetration-again, by governmentpolicy-was not sufficientto discipline these margins across sectors. An overvaluedexchange rate and significant import protection led to an environmentwhere, excludingoil and steel, less than three percent of sales were in export markets.
3.2 Labor in the Manufacturing Sector: Policies and Evidence
3.63 This sectiondescibes the Venezuelanlabor laws and policiesand presentsdata on wages and non-wagecosts. In the 1970sand 1980, the governmentintroduced measures to increasewages and non-wagebenefits. The evidencesuggests that althoughnon-wage costs increasedas a share of total labor costs to the employer, real wages fell between 1975 and 1988. This section concludes with a discussion of proposed labor legislation.
3.64 Labor Policies: An Overview. Statutory wage and non-wage costs are listed in Table 3.22. In addition to payments for overtime and ;iolidays,the most importantnon-wage costs are:
(1) Profit-sharingbonuses equal to ten percentof a company's liquidprofits, up to a maximumof two months' salary per employee. These bonuses are mandatedfor all firms of a certain size.
(2) Severancepay (cesanda)for workers fired withoutjust cause, which doublesthe standard pension (antiguedad)to departingworkers. The combinedpayments are equal to one month's pay for each year worked, based on the last month's salary.
(3) A contributionof two percent of wages and salaries, as well as .5 percent of the ten percentnrofit bonus, to the NationalTraining Institute, INCE.
(4) Social securitypayments by the employer(seven percentof wage bill) and employee(four percent) covering retirement, maternity, disability, sick leave, marriage payments, and burial expenses. [681
Table 3.22: Wage and Non-wage Benefits, 1989.
Wages above salaries
* Paid Holidays - Statutoryholidays plus 15 working days per year.
* Overtime-- 25 percent premium for overtimeand 20 percent for night time.
Complementarvpayments
* Profit-sharingbonuses -- Companieswith capital over 50,000 b's must pay ten percent of profits (up to two months' salary) annually.
* Transportationsubsidies - Companiesemploying five or more workers must pay a monthly transportsubsidy to low-wageworkers.
v Other payments - Lunch programs, disability programs, paymentsfor other benefits not covered by social security.
Training
* National TrainingInstitute (INCE)- Companieswith more than 20 employeesmust hire and train 14-18-year- olds equal to fivb percant of total employeesor pay contributionto INCE. Companieswith four or more workers must givt ivwopercent of wages, salaries as well as .5 percent of wage premium to INCE.
Hiring and Firine Costs
* Indemnityfor severance (cesantia)- One-halfmonth's wages for every year of service, paid at employee's current wage.
* Length of service (antiguedad)-- One-halfmonth's wages, basedon precedingmonth's salary for every year of service.
* Payment in lieu of notice (preaviso)-- Upon mutuallyagreed terminationof employment,maximum of one month's salary.
* Social security -- Computedas percentageof wage bill; seven percent paid by employer and four percent by employee. Benefits include: medical coverage; disability;old age pensions; marriage payments; burial expenses; matemity; sick leave.
Sources: "El Impacto del Proyecto de Ley Orgarica del Trabajo", IESA, 1989; Doing Business in Venezuela, Price Waterhouse;Mission interviews. [69 1 3.65 The law regulatingseverance payments provides double the usual severance payment if a worker is laid off without a 'just cause". An employer must either submit a request to a tripartite committee(with representativesfrom the Labor Ministry, labor unions, and business) to determine if a dismissal is justified or make the severancepayment The committeeis slow in processingapplications and most employers prefer to pay the double indemnityrather than submit requests to the Committee.
3.66 Sinceseverance payments are based on the last month's wages, they are indexedfor inflation and for merit increases. Employers are concerned by the uncertainty these payments impose in an inflationaryenvironment. Employers also complain that the double indemnitylaw encourages workers to leave to collect the indemnity. The law conveys a perverse incentive in that workers receive greater benefits for being fired than for resigning so workers are encouragedto provoke their dismissal. At the same time, the law discouragesemployers from keeping employeesover a long period.
3.67 Firms provide substantialnon-wage benefits and may also offer schoolingor transportation, often in conjunctionwith labor contracts. Wage and non-wagecosts are documentedbelow. Since the data are taken from enterprise surveys, it iv only possible to quantify non-wage costs, as opposed to benefits. Not all costs to employersare perceivedby employeesas benefits. For example, the payment to INCE for training is a cost which does not benefit the employeesin whose name it is paid.
3.68 Trends in Non-wage Costs. Social benefits mandated through labor legislationincreased the share of non-wagecosts over 1975-88 (Table 3.23A). For skilled workers, the ratio of non-wage costs to salaries increased from 58 percent to 95 percent; for unskilled workers, from 52 percent to 84 percent. As a share of total labor costs, salaries declinedfrom 64-66 percent to 51-54 percent. The steepest increases in non-wagecosts occurred between 1984 and 1988. Between 1975 and 1984, non- wagecosts rose from 34-36 percentof labor costs to 38-39 percent. During 1984-88,however, non-wage costs increasedto nearly 50 percent of the total.
3.69 Table 3.23B shows non-wagecosts/salaries by size of plant. Plants with over 50 employees generallypaid higher non-wagecosts than smaller plants. The difference in non-wage costs for skilled and non-skilledworkers was also less significantfor large plants. For large plants, the ratio of non-wage costs to salaries for skilled and unskilledworkers in 1988 was 97 percent and 87 percent respectively. For small plants, the ratio of non-wagecosts to salaries was 59 percent and 52 percent for skilled and unskilledworkers respectively. Althoughthe share of non-wagecosts was lower for small plants, the increase in non-wagecosts was the highest for unskilledworkers in small plants.
3.70 Changesin the Real Wage. The increasein non-wagecosts has been accompaniedby a fall in the real wage. Table 3.24 shows changesin both real wages and real remuneration,defined as the sum of wages and non-wagecosts. Real wages declined significantlyfor both skilledand unskilledworkers. Using the GDP deflator, real wages declinedby 2.8 percent annuallyfor skilledworkers and 1.6 percent for unskilledworkers. Using the CPI deflator, real wages declinedby 3.2 percent annuallyfor skilled workers and 1.9 percent for unskilledworkers.
3.71 If both wage and non-wagecosts are included in total remuneration, Table 3.24 shows a smallerdecline in real labor costs over 1975-88. The index for skilledworkers, expressed in real terms usingthe GDP deflator,declined from 1.10 in 1975to .95 in 1988-a declinein real wages of one percent per year. For unskilledworkers, however, real remunerationremained almost constant. If the CPI is used to deflate wages, the decline in real remuneration appears greater. For skilled workers, real remunerationdeclined at 1.6 percent per year; for unskilledworkers, the rate was .5 percent per year. 170 1
Table 3.23A: Share of Non-Wage Cos s in Total Labor Costs.
1975 1979 1981 1984 1986 1988 Non-Waee Costs/Salaries Skilled Workers 58% 53% 59% 65% 74% 95% Unskilled Workers 52% 58% 58% 63% 67% 84%
Salaries/Total Labor Costs Skilled WVorkers 64% 65% 59% 61% 58% 51% Unskilled Workers 66% 63% 60% 62% 60% 54%
Table 3.23B: Comparison of Non-Wage Costs/Salaries by Plant Size.
1975 1979 1984 1988 Plants with fewer than 50 emplovees Skilled Workers 42% 44% 43% 56% Unskilled Workers 29% 31% 37% 52%
Plants with more than 50 emplovees Skilled Workers 59% 54% 66% 97% Unskilled Workers 57% 61% 66% 87%
Source: World Bank staff calculations based on OCEI data.
3.72 Table 3.24 also compares labor costs in sectors dominated by public enterprises to earnings in other sectors. Both wages and total labor costs were higher in the sectors dominated by public enterprises. Real wages varied from 60 percent greater in 1984 to 20 percent greater in 1988. Real remunerationwas twice as great in sectors dominatedby public enterprises as in other sectors in 1975, and 1.7 times as great in 1988. The larger disparitybetween the two when total remuneration is used for comparison rather than wages reflects the greater importanceof non-wagecosts in petroleum, steel, and aluminum.
3.73 Changesin real earnings between 1975 and 1988 have also differed between public and private plants. Usin' the GNP deflator, real remunerationhas stayed almost constant in sectors with a predominanceof privateenterprises. In petroleum,steel, and aluminum,hewever, real remunerationhas declined by one percent annually. This suggests that real earnings outside of these sectors remained essentiallyconstant over 1975-88. Labor productivitydeclined by more than four percent annually in sectors dominatedby public enterprises, but increased in other sectors. It appears that declining real wages in aluminum,petroleum, and steel reflect the decliningproductivity, although the rate of decline exceeds the loss in real earnings. [71 1
Table 3.24: Indices of Real Wage and Non-Wage Payments, 1985-1988. (1984=1.0)
1975 1977 1979 1984 1986 1988 Total RemunerationUsine GNP Deflator SkilledWorkers 1.10 1.10 1.08 1.00 1.08 .95 UnskilledWorkers .97 1.01 1.04 1.00 1.08 .96
Total RemunerationUsine CPI Deflator SkilledWorkers 1.06 1.04 1.09 1.00 .96 .86 UnskilledWorkers .93 .96 1.05 1.00 .95 .87
Waees Using GNP Deflator SkilledWorkers 1.15 1.19 1.17 1.00 1.03 .80 UnskilledWorkers 1.03 1.08 1.08 1.00 1.05 .84
WagesUsing CPI Deflator SkilledWorkers 1.11 1.12 1.18 1.00 .91 .73 UnskilledWorkers .99 1.02 1.09 1.00 .93 .77
Source: WorldBank staff calculationsbaed on OCEIdata.
3.74 InternationalComparisons. In 1975and 1985, the share of non-wagecosts in Venezuelan earnings was higher than in several other Latin American countries-includingBrazil, Chile, and Peru (rable 3.25)-but lower than in Colombia, Mexico, and Argentina, and a number of industrialized countries. However, the largest increase in non-wage costs occurred between 1984 and 1988 (Table 3.23), when non-wagecosts were nearly 50 percentof remuneration. Using 1988for comparison, the share of non-wagecosts in Venezuelanearnings would exceed all other Latin Americancountries in Table 3.25 except Colombia.
3.75 If labor costs are compared using total earnings as a percentage of value-added, then Venezuela'slabor costs are the highest for a group of Latin Americancountries (Table 3.26). The share of earningsin value-addedin 1986 was equal to Koreaand Singapore, and higher than Turkey. Between 1970 and 1986, the share of earnings in value-addedfor Venezuela fell from 31 to 27 percent. This contrasts with the sharp drop in the labor share in Mexico from 44 to 21 percent. These comparisons should be regarded lightly since they may reflect differing methodsof measuring earnings and/or value- added.
3.76 Assessment. Internationalcomparisons suggest that the share of labor costs in value- added in Venezuela is relatively high. High labor costs, in combination with low rates of labor productivitygrowth, may be two factors which accountfor the drop in real earnings over 1975-88. This section also documentedthe increasingshare of non-wagecosts in total earnings. 1 72 1
Table 3.25: Non-wage Costs: International Comparisons. (Non-WageBenefits as Permentageof Total Retum to Labor)
1975 1985 1975 1985 1975 1985 Latin America: Argentina 35% 46% Brazil 35% 38% Colombia 52% 62% Chile 51% 25% Mexico 39% 45% Peru 24% 35% Venezuela 35% 41% Africa: Kenya 13% 13% Morocco 19% 19% Malawi 14% 13% Nigeria 10% 10% Tanzania 10% 12% Zambia 9% 9% Asia: Hong Kong 15% 20% India 24% 25% Japan 14% 17% Korea 20% 20% Pakistan 15% 15% Singapore 28% 35% Eurone: Greece 55% 55% Portugal 24% 30% France 76% 86% Austria 70% 83% Germany 60% 75% Spain 50% 40% Sweden 45% 67% U. K. 23% 33% North Amerka: USA 32% 37% Canada 23% 28%
Source: OCEI and Riveros(1989).
Table 3.26: Total Earnings as a Percentage of Value-Added: International Comparisons.
1970 1984 1986 1970 1984 1986 Latin America: Argentina 30% 23% 21% Brazil 22% 20% 20% Colombia 25% 20% 20% Chile 19% 15% 15% Peru - 19% 19% Mexico 44% 21% 26% Venezuela 31% 26% 27% A=:. Korea 25% 26% 27% Singapore 36% 36% 27% Thailand 25% 24% 24% Indonesia 26% 18% 24% India 47% 48% 48% Japan 32% 35% 37% Others: Greece 32% 39% 39% Turkey 26% 24% 24% Spain 52% 40% 41% USA 47% 39% 39%
Note: Total carmingsinclude all remunerationto labor. Source: World DeveloomentReport, 1989. 173 1 3.77 The changing compositionof labor costs. T'he VenezuelanGovernment should evaluate the effects and efficiency of labor laws which so strongly proscribe the form and amount of wages. Several factors suggestthat new, less rest,-ctive laws could increaseemployment and reduce labor costs without reducing employeebenefits.
3.78 First, employeeswould generallyrather have cash wages than benefits with an equivalent cost to the employer. If employers and employeeshad the choice of raising wages and reducing non- wage payments, the current mix might be changed. Second,although real labor costs to employershave remained roughlyconstant, a significantpercentage of non-wagecosts do not benefita firm's employees. While the costs may be for legitimatesocial programs, it is questionablewhether the best method of funding them is with a tax on wages. Third, rising non-wagecosts may have increasedlabor turnover and reduced employmentstability for recently hired employees. One study found that the majority of workers had less than five years' seniority, and only 18 percent had more than ten years with their company. Many firms resort to short-term employmentand they are encouragedto use more capital- intensiveproduction techniques. Contractingservices external to firms have been used to reduce labor costs and improve flexibility. Finally, severancebenefits may inhibit worker mobility, particularlyfor employeeswith seniority, thereby making industrialrestructuring more difficult.
3.79 Proposed legislation. The inefficiencyof non-wage payments is critical in light of proposed labor legislationwhich has the followingprincipal components:
(1) Profit sharingwould increasefrom ten percentor a maximumof two months' salary to 15 percent of companyprofits or a maximumof four months' salary.
(2) Vacationwould be increasedfrom 15 days per year to an additionalday for each year of seniority, to a maximumof 15 additionaldays.
(3) Severancepayments wouldbe granted regardlessof cause and doubledto one month for each year of service, based on the previousmonth's wage. Profit-sharingbenefits wouldbe included in the base for calculatingseverance payments.
(4) Productivityincreases must be compensatedby wage increases.
3.80 The proposed changeswould be likelyto acceleratethe share of non-wagecosts in total costs and to raise the cost of employmentin the formal sector. Further research should be undertakenon the expectedeffects of the proposed labor legislation.
3.3 Foreign Investment in the Manufacturing Sector
3.81 Direct foreign investment(DFI) has been small in the manufacturingsector. However, reforms initiatedin 1986and extendedin 1990 permit a more efficient use of foreign investment. This section (1) describes the regulatoryenvironment for DFI prior to the recent changes and contrasts it to the present system; (2) uses firm-leveldata to describe the structure of foreign investmentover 1976-88; and (3) comparesthe behaviorof domesticand partially-foreign-ownedfirms with respect to productivity, wage, importuse, and export orientation. Differencesin behavior allowprojection of the potentialeffects of recent reforms which permit increasedforeign participation. [74 1
Table 3.27: Changes in Regulation of Foreign Investment under Decree 727.
BeforeDecree 727 After Decree 727 Sectoral Lmiations
Some areas reserved exclusivelyfor nationalinvestors and All areas but petroleum,basic industries, media, others for mixed enterprises(basic industries,exporting professionalservices, public safety, and banks open services, transport of goods, and postal services. to 100 percent foreign ownership.
Share Acquisition
Prohibitionagainst acquiringshares in existingenterprises. Transferof shares possiblewithout govenmcnt approval.
Remince of Profit
Remittancelimited to 20 percent nius LIBORof book value of No restrictionson remittanceof dividends. registeredforeign investment.
TechnologyContraccq
Paymentsabroad require governmentapproval, no payments No restrictionson technologycontracts. allowedto foreignparent company.
Tax PoUcy
50 percent tax rate on corporateincome of foreignenterprises. Proposedtaxlegislationwouldapply3Spereritflattax Additional20 percent tax on profits remittedabroad. on al' enterprises.
3.3.1 Regulationof Direct Foreign Investment
3.82 BeforeFebruary 1990foreign investmentwas closelyregulated (Table 3.27). Restrictions were imposed on sectors open to DFI, profit repatriation, re-investment, and tax rates. This section describes the regulationsand discusses reforms under Decree 727.
3.83 Sectors. Venezuelanfirms are classifiedby degree of foreign ownership into three types: national, with less than 20 percent foreign ownership; mixed, with 20 percent to 49.9 percent foreign ownership; and foreign firms, with majority foreign control. Some sectors were reserved to national firms (telephones,water and sewage, electricity, garbage collection, mass media and advertising, and professional consultingwork). Other sectors, such as basic industries, the marketing of Venezuelan goods, and internal transport allowed mixed, but not foreign, firms.
3.84 Reforms in 1986 modified these regulations and Decree 727 opened most sectors to foreign ownership. Only petroleum, media, professionalservices, public safety, and banks are reserved for nationalfirms and, except for basic industries, all sectorspreviously opened to mixed firms are open to foreign finms. 11751 3.85 Investmentand profit regulation. The Superintendenciade InversionesExtranjeras (SIEX) regulatesforeign investmentand, before Decree 727, held substantialdiscretion. Profit remittanceswere limited to 20 percent (plus LIBOR) of the investment (based on book value) which was considered insufficient by most investors. Since purchase of equity in existing firms was prohibited, foreign investmentcould only be in the form of direct investmentregistered with SIEX. SIEX was more than a registry however, as it set the value of the investmentfor profit repatriation. Payments by a firm for its foreign parent's technologywere prohibited, and contractsthat called for royalty or patent payments needed SIEX approval. When Decree 727 eliminatedthe restriction on repatriation, it also eliminated secondary concerns, such as the valuationof the investment. Bureaucraticdiscretion has been eliminated from the registry and SIEX can only reject foreign investmentswhich do not comply with the sectoral restrictions.
3.86 Other regulations. Foreign firms faced higher tax rates on corporate income-50 percent versus 35 percent for domestic firms. This is being addressed in pending tax legislation. Also, the regulation of foreign investment contained restrictive provisions disallowing exclusive use and confidentialityof trade secrets clauses in joint ventures. These restrictionsare being negotiated as part of agreementson property rights. Foreign firms were obligatedto buy bolivares at the official exchange rate rather than the free marketrate, but were permittedto repatriateprofits at the officialrate. This was eliminatedwhen the exchangerates were unified.
3.3.2 Sectoral Pattern of Foreign Investment
3.87 OCEI's industrialcensus gives the percentage of subscribedcapital owned by domestic investors. Very few plants have any foreign ownership. In 1976, 93 percent of plants were 100 percent domesticallyowned, two percent were "mixed," and three percent "foreign." This continuedto 1988, with 94 percent of plants domesticallyowned, three percent "mixed," and two percent "foreign.' The pattern of limitedforeign participationheld-although less strongly-among large plants: For plants with more than 100 employeesin 1988, 85 percent were 100 percent domesticallyowned.
3.88 Foreign ownership was three percent in 1976 and in 1988. However, because foreign- owned plants tend to be larger, the unweightedaverage understates the magnitudeof foreignparticipation. In Table 3.28 foreign ownership is weighted by fixed assets and by employment. In terms of fixed assets, foreign ownership rose from nine to elevenpercent between 1976 and 1988, whereas in terms of employment,foreign participationdeclined from eleven to eight percent.
3.89 International comparisons of foreign ownership are difficult, as data are usually not comparable. Dunning and Cantwell(1982) estimatedthe ratio of foreign capital to GDP for 1982, and found Venezuelaslightly below the Latin Americanaverage, at ten percent comparedto the average of 11.5 percent.
3.90 Foreign ownership is narrowly concentratedin a few large foreign establishmentsand mixed enterprises. In 1988 three (metalproducts and machinery,chemicals, and food processitig)of the nine two-digitsectors accountedfor almostthree quarters of foreign ownership. If each plant's value of foreign assets is calculatedas the plant's fixed assets times the percentageof capital not held by domestic owners, in 1988 the five plants with greatest foreign ownership accountedfor 35 percent of foreign- owned assets, and the top ten accountedfor 44 percent. Since some firms operate more than one plant, firm-level concentrationmay be higher. 176 1
Table 3.28: Sectoral Patterns of Foreign Ownership, 1976-88.
Percentage of foreign ownership: Distribution of weighted by weighted by foreign ownership ftxed assets employment among sectors 1976 1985 1988 1976 1985 1988 1976 1985 1988
Total 9% 10% 11% 10% 10% 8% 100% 100% 100%
Food, beverages, tobacco 6 8 8 8 8 7 14 11 14 Textiles, clothing 11 6 4 8 5 2 11 2 3 Wood, wood products 0 0 1 0 0 0 0 0 0 Paper, paper products 17 13 13 10 10 8 14 4 7 Chemicals, petroleum 16 7 7 16 13 10 18 13 14 Pottery, glass 4 13 9 7 1S 8 5 11 7 Iron, steel, aluminum 5 4 9 6 7 10 13 12 9 Metal prod., mach., & transport 21 38 29 17 18 16 25 43 45 Professional equipment 15 24 17 83 20 18 1 1 1
Source: World Bank staff calculations based on OCEI data.
3.91 DFI in Protected Sectors. Investment can be a means to enter a market which is inaccessibledue to protection. In Venezuela,the top two manufacturingplants in terms of foreign-owned assets were motor vehicle plants which accountedfor 25 percent of foreign-ownedassets. Since motor vehicle imports were banned until 1989, DFI was a means to avoid prohibitionsand capture rents under the protective environment. In food processing DFI and protection have also been relatively high. However, the correlationbetween quota coverageand share of DFI in 1988 was -.25 and was statistically significant. This negative correlation suggests that although DFI may have been attracted to some protected sectors, foreign investmentwas generally in sectors with relativelylow quotas. The direction of causation is not clear: It may be that policy-makers granted less protection to foreign-owned enterprises.
3.3.3 Characteristicsof Foreign and Domestic Firms
3.92 Plants with foreign participationmay behave differentlythan domestically-ownedfirms. Direct investment is often thought to induce and diffuse productive innovations. In the context of Venezuelanregulations that only allowed investmentthrough physical investment, foreign participation may be associatedwith technologytransfer. Also of interestis the trade orientationof foreign-affiliated firms. These questions are analyzed below. Establishments classified as having greater foreign participation(more than five percent of the canital foreign-owned)are comparedwith other plants.
3.93 Productivity. Labor productivity-outputper employee-is greater in plants with foreign participation (Table 3.29). In 1988, output per employee was 93 percent higher and value-addedper employeewas 140 percent higher in plants with foreign participation. Some of the differentialwas due to the 81 percent larger capital per employeeof the foreign-affiliatedfirms. However, capital intensity
I'-'. * l [ 77 l is not enoughto account the differential. Capital-outputratios were nearly the same, indicating a pure productivityadvantage for the foreign plants.
Table 3.29: Behaviorof Plants with 5% or More Foreign Participation and Plantswith 100%Domestic Participation, 1976-88. t
All Plants Large Plants 1976 1981 1988 1976 1981 1988
Gross Output per Employee: 1.6 1.6 1.9 1.4 1.3 1.7 Value-added per Employee: 1.7 - 2.4 1.4 - 1.8 Fixed Assetsper Employee: 1.5 1.7 1.8 1.5 2.1 2.2 Fixed Assetsto Output: 1.0 1.0 1.0 1.1 1.6 1.3 Importsas % of Raw Materials: 3.0 3.4 3.7 2.0 2.2 2.2 Exports as % of Sales: - 13.6 10.0 - 11.6 8.0
Note: t Table shows ratioof valueof selectedindicators for firms with greatr than 5% foreign ownershipto value for firms with less than 5% foreign ownership. Source: World Bankstaft calculationsbased on data from OCEI.
3.94 The differential is not explainedby size, either. A large differential exists even when attentionis limitedto large plants (more than 100 employees). For these plants, value-addedper worker is 80 percent higher in non-domesticestablishments, even though capital per worker is only 120 percent higher. The productivitydifferential varies across sectors from 78 percent in basic metalsto 230 percent for food, beverages and tobacco (Table 3.30). This suggeststhat the differentialis not an artifact of a few large foreign affiliatedfirms in very productivesectors.
3.95 While the differentialin labor productivityis striking, perhaps even more striking is that the differentialis widening. The percentagechange in ouitputper employeeover 1976-88was 30 percent lower for exclusivelydomestic firms. This is not due to foreign investmentin the more dynamicsectors: Even if we examine only plants that existed before 1976, productivitygrew 25 percent faster "or firms with foreign participation. The reasons firms with foreign participation had higher productivity and productivitygrowth have not been determined. Foreign control is not the explanationas the productivity of "mixed" firms is nearly identicalto that of "foreign" firms.
3.96 Export and import behavior. Another distinguishingfeature of firms with foreign participationis that their shares of imports as a percentageof intermediatesand of exports as a percentage of sales are higher than domestic firms'. In 1988 imports as a percent of material input costs were I 1 percent for wholly domesticestablishments and 41 percent for establishmentswith significantforeign participation. Plants with foreign investmentuse more importedintermediates, and this holds across all sectors.
3.97 Exports constitute, on average, less than one percent of sales, and 94 percent of plants had no export sales. The ratio of exports to sales is higher among firms with foreign participation- [78 1 six percentin 1988. The highershare of exportsales holds in every sectorbut food processing (Table 3.30). The reasonsfor the greaterexport concentration of foreignfirms were not verified, althoughmultinational participation generally is importantin manufacturedexports (cf. Blomstrom, Kravis, and Lipsey, 1988). Associationwith a foreignfirm is usefulfor marketingby allowingthe affiliatedirect access to the networkof the home company. Possiblythe affiliationhelps in the productionof the typesand qualitiesof goodsappropriate for internationalsale.
Table 3.30: Sectoral Comparison of Foreign and Domestic Firms In 1988. t
Value-added Capital per Importsas Exportsas per worker wo % of inlUts % of ales
TOTAL 2.4 1.8 3.7 10.0
Food, beverages,tobacco 3.4 1.9 5.6 .5 Textiles, clothing 2.5 1.7 .9 7.1 Paper and paper products 2.2 2.0 2.7 3.8 Chemicalsand petroleum 2.1 1.3 1.9 13.3 Pottery, glass 1.9 3.0 6.3 33.8 kron,steel, aluminum 1.8 1.6 2.4 4.4 Metal products,machinery, transport eqpt. 1.9 1.6 3.8 13.5 Professionalequip. & misc. 2.3 1.1 2.3 .5
Note: tTable hows ratio of valje of selected indicatorsfor fims with greater than 5% foreign ownershipto value for fimnswith less than 5% foreignownership. Source: WorldBank saff calculationsbased on data from OCEI.
3.98 Assessment. Beforethe recent reforms, restrictiveinvestment practices limited the participationof foreignenterprises. In addition,restrictions on foreignacquisition of equityin existing firms biasedthe compositionof capitalflows towardsdebt. However,the superiorproductivity and exportperformance of plantswith foreignparticipation suggests that recent reforms,which open the economyto greaterforeign participation, may havebeneficial effects on performance. 4. AGENDAFOR THE 199Os
4.1 Venezuelain the 1980sengaged in a mamsivegoverrment intervention in the economic life of the nation. The programsthe governmentadministered, discussed in Chapter2, involved enormous,discretionary benefits which were given withoutcoordination or adequateaccountability: preferentialexchange rates withbenefits between five and 19 percentof GDP between1984 and 1987 (Table2.4); a currencvretention scheme for exportersequal to about2.8 percentof GDP for exports whichwere only 2.0 percentof GDP (Section2.1.2). The systemwas so complexit is impossibleto determineits beneficiariesfrom a priori theory. These programsled to distortionsand widespread corruption. The industrialsector's record duringthe 1980s(Chapter 3) is a story of weak growth, decliningproductivity, low capacityutilization, and reducedinvestment. 4.2 Venezuela'sapproach to economicmanagement did not differfrom many other nations'. Krueger(1990, p. 9) describedthe pervasivetheory of economicdevelopment as: "Governmentshould ... undertakeactivities that wouldcompensate for 'market failures.' Thesewere regardedas beingso muchmore extreme in developingcountries as to maketheir economiesdifferent not onlyin degreebut in kdndfrom industrialcountries. Marketfailures were thought to result from 'structural rigidities,' which were definedas a lack of responsivenessto price signals. It was thereforeconcluded that governmentsshould take a leadingrole in the allocationof investment,control the 'commandingheights' of the economy,and otherwiseintervene to compensatefor marketfailures." 4.3 Throughoutthe world,governments are redefiningtheir rolesin responseto their policy failures. "The collectiveoptimism of the nationalistera has given way to a sullenand embittered recognitionthat the sacrificesof the manyhave createddisproportionate opportunities for a few. How do policychoices, ostensibly made for thepublic good, become the basis for privateaggrandizement? By whatprocess does a visionof the publicgood erode?" (Bates1981, p. 6). 4.4 The VenezuelanGovernment has abandonedthe instrumentsit used to control the industrialsector in the 1980s,and is eliminatingother discretionaryindustrial incentives. The economy is being openedto foreigninvestment; taxes are being reformed;and privatization,public enterprise restructuring,and financialsector reform programs are being introduced.The thrust of these reforms is to reducethe Government'srole in the economyand to give greaterprominence to market-based incentivesand decisions. 4.5 Venezuelanindustrialists report a renewedoptimism and confidencein the future profitabilityof theirfirms. Entrepreneurialattention has been refocussed from ;leading for governmental relieftoward the fundamentalsof businessmanagement. They have begunsome investment programs to competein an open economy,but theypoint to a longagenda of unresolvedproblems-all related to governmentpolicies or services: ports (INP), shipping(CAVN), tele-communications (CANTV), electricity,and inputs from state-owned enterprises (e. g., aluminum,steel, petroleum products). Actions here have not keptpace withthe reformswhich have been forcedon the privatesector. 4.6 The programis a year-and-a-halfold. Muchhas been accomplishedquickly, but the changesare far fromfinished. Mostchanges have been made by Presidentialo' Ministerialdecree and couldbe reversedas easilyand quicklyas they wereintroduced. Their tenurewill dependon a new understandingin Venezuelaabout the limitsof governmentand markets. The VenezuelanGovermnent of the 1980s neglectedthe legitimatefunctions of government-provisionof public goods and 1801 infrastructure, educationand training, public health, modern systemsof welfare maintenance,equitable and effilient tax collection and administration-and intervened ini areas where the government was unqualified-control of imports, prices, and hivestment.
4.7 The policy failures of the 1980s ha/e been widely recognized. In the 1990s the governmentmust restructure, keeping in mind its economicobjectives, the range of instrumentsavailable to achieve them, and the limits of governmentexpertise and competence. Trere are many functions which governmentsimply cannot perform at any reasonablecost. The problem is acute in Venezuela where governmentalsalaries are too low to attract a sufficientnumber of well-qualifiedprofessionals to administerprograms requiring extensiveprofessional manpower.
4.8 The DevelopmentMinistry has been a leader within the Venezuelangovernment in its internal reforms and restructuringto implementthe new policies. Its accomplishmentsto date have been impressive and offer promise that the reform will realign the boundaries between governmental responsibilitiesand market-baseddecisions to encouicagea more efficient allocationof resources and higher rates of economicgrowth.
4.9 For the industrialsector, the outstandingitems on the policy agenda are the continuation of the trade policy reforms and implementationof a domestic policy regime supportive of internal competition. Solid foundations hase been laid for both of these actions with the reforms to date. However, difficultsteps lie ahead for the Governmentto allow the industrialsector to achieveits potential to generateincome and employmentthrough effectivecompetition in internationaland domesticmarkets. In Section 4.1 we discuss outstandingissues in the trade reform and recommendprinciples to guide the reforms to their conclusion. In Section4.2 we discuss the role Afthe DevelopmentMinistry in the domestic market, focusing on three importanttasks: promotingc.mpetition; fostering investment;and information, research, and analysisto advance the broad interests of the industrialsector in economic policy-making.
4.1 Trade Reeorm: Next Steps
4.10 The trade reform has replacedthe system of uncontrolled,ad hoc protection and costly export subsidieswith a system which-when it is fully implementedin 1993-will use effective exchange rate management in place of directed programs aimed at import substitutionor export promotion. Moderatetariffs-between ten and 20 percent-wouldprovide additionalprotection for domesticeconomic activities,and the Csvernment's intentionis to give comparablelevels of effectiveprotection to all sectors in order to encourageefficient resourceallocation. Licenses would providefurther protectionto no more than five percent of domesticmanufacturing. This protection through licenses and tariffs would leave 4 residual anti-exportbias which wouldbe acceptedas a cost to Venezuelanconsumers. Export subsidies wvouldbe eliminated.
4.11 In the initial phases of the trade reform, the Governmenthas coordinatedthe program among affected Ministries and with the private sector. It has conscientiouslyimplemented the program under a tight schedule, with limitedresources, and consistentwith the principlesof treating all economic activitiesequally. Many crucial steps and decisionsremain as the Governmentmoves toward its medium- term goals for trade policy in 1993. Not all of the elementsnecessary to the success of the trade reform program are within the direct control of any single Ministry, and it will be importantto continueto work within the Cabinet and other decision-makingbodies to advancethe policies which will contributeto the program's success. [811 4.1.1 Exgbang Rate
4.12 The most importantsingle element of the trade reform program has been unifying and floating the exchangerate. In the future, it will be necessaryto managethe exchangerate to avoid the mistakes of the 1980s in the face of unexpected changes in petroleum prices. The Government is studying the feasibility of an oil stabilizationfund whereby 3xcessoil revenues would be absorbed into a special reserve when prices are unusuallyhigh to be utilized when they are unusuallylow.
4.13 Exchangerate managementwIll encouragean efficient allocationof resources between the traded goods sector (importablesand exportables)and the nontraded sector. Investors naed a ciear understandingof the Government'sexchange rate policies and an abilityto formulatereliable expectations of future exchangerates. This is a fundamentaldeterminant of investmentin the tradable goods sector.
4.14 Under an exchangeregime which accommodatespetroleum price shocks, the exchange rate reveals the relative values of domesticallyproduced and imported goods. Venezuela will always enjoy foreign exchangeinflows from its petroleum exports and these resources shouldbe used to import those items which Venezuela produces least efficiently. Policies or programs which would "conserve foreign exchange" (through import substitution) or "promote exports" (through subsidies or other concessions)would be misguidedgovernment interventions which would lead to inefficientconsumption and production. If the exchange rate were not properly managed, there may be a rationale for such programs, but it is questionablewhether a governmentwhich cannot managean exchangerate effectively could manage a more complicatedprogram of taxes and subsidies. Certainly the Venezuelanre.;ord of the 1980s is not encouraging.
4.1.2 Uniform Treatment of Sectors
4.15 One of the cornerstonesof the adjustmentprogram has been to re-orient the economy based on transparent,broadly applicable principles rather than the previousarray of industry-specificrules and standards. With the notable exception of agriculture (which is currently being addressed) the Governmenthas, to date, maintainedan admirable degree of uniformityof treatment among economic sectors. This is an important element of the program, both politically-to show impartiality, and economically-to allow market forces, rather than bureaucratic or political decisions, to reveal the activitieswhich are most robust.
4.16 Where sectors are not treated uniformly, resources may be driven out of unfavored activitiesand toward the favored, instead of toward more efficient alternatives. The costs of adjustment would be borne more heavily by the efficient sectors and less heavily by the inefficient-exactly the opposite of what should occur. Within Venezuela, there are many industrialists who support the adjustmentprogram whole-heartedly,and many others who support it "except as it applies to my own sector, which is really differentform the rest and merits specialtreatment because .... " The Government should continueto resist the mountingpressures to grant industry-specificconcessions.
4.17 Adjustmentwill succeedonly if resourcesare releasedfrom inefficientactivities to move toward more efficient ones. Governmentconcessions which would retain employeesin inefficientlines of productionwill underminethe program by not makingthose workers availablefor other employment. Where firms complainthat they will be put out of business, it should be recognized that this is one of the necessaryconsequences of adjustment. If these are efficient, productive enterprises, then they will be financiallyreorganized under new or existing owners and production will continue. If they are not (82 1 efficient then they will close forever. Workers will find new employmentand what can be salvage4 of the factories will be. The failure of the activity signified that domesticproduction costs more than its value added at world prices. Only by movingproductive resources out of such activitiesand toward their international comparative advantage can the economy's adjustment succeed. These old, inefficient patterns of allocationprecipitated the crisis which led to the adjustmentprogram, and they are exactlir what adjustmneniseeks to change.
4.1.3 Licenses
4.18 The remaininglicenses and prohibitionsare concentratedin Subsector31, food, beverages and tobacco (Table 2.7B). Most of these licenses were retained pending resolution of the agricultural trade reform, and can be eliminated in conjunction with it. If those licenses and prohibitionswere replaced by tariff protection, then the index of productioncoverage would drop from 15 percent of the manufacturingsector to 4.7 percent-within the Government'starget for coverageat the end of the reform program.
4.19 The other class of itemsfor which prohibitionswere retained were 'luxury goods' such as specialty food items. A more efficient strategy would be to eliminate these restrictions and to use excise taxes which woulu apply uniformly both to domestic and to imported luxury goods. With prohibitions, uncontrolled protection is provided to domestic producers of luxury goods or their substitutes. The producers thereby earn supra-normalprofits and, in the lovg-run, investmentwould be attracted away from more efficient alternativesto produce the protectedluxury goods.
4.20 The final point here is that the Government should consider a longer-term goal of eliminating all licenses and prohibitions. With tariffs, internal prices will move with border prices, separated only by the percentage of the tariff rate. Licenses have the undesirablefeature of divorcing internal prices from world prices (see Section2.1.1.4). Productiveresources are not allocatedaccording to underlyingglobal economicforces, but the whim of governmentpolicy makers. To the extent that the governmentwishes to exempt some sectors from the forces of the adjustmentprogram (expressed in Venezuelaby the five percent target for licenses and prohibitions),it would be preferable to grant direct productionsubsidies or fixed-term(one or two years)tariff protection slightly(five to ten percent) above the ceiling for other sectors.
4.1.4 Tariffs
4.21 The maximumtariff has been reduced, in two steps, from 135 percent to 80 percent to 50 percent. However, the most difficult tariff reductions are yet to come. At each stage of tariff reductions, a greater proportion of the domestic economy is subjected to foreign competition. Manufacturers which are unchallenged by imports with a 50 percent tariff rate will fini greater competitionas tariffs fall to 20 percent. The politicalpressures to postponeor cancel subsequentstages inithe reform will increase at each successiveround of tariff reductions.
4.22 In resistingthese pressures, policy-makersshould point out the benefits which accrue to Venezuelans-bunefitswhich will be greater than (thoughperhaps not as visibleas) the costs. Consumers will pay lower prices. With tariff reductions, and effective exchangerate management,there shouldbe a compensatingdevaluation of the exchangerate which would afford broad protection uniformly to all domestic manufacturingas well as a greater incentive for export-orientedactivii.es. The effect should be to draw resourcesinto traded goods sectors and out of non-tradedgoods, strengtheningthe Venezuelan [ 83 1 economy and increasing its competitivenessin domestic and internationalmarkets. Two key elements here are the importanceof effective exchangerate managementas well as adoptionof policieswhich will encourage resources, particularly labor, to exit from uneconomic industries and move toward more efficient and competitiveactivities.
4.23 As the Government&.proaches its medium-termtarget of a ten to 20 percent tariff range, it should consider a longer-termgoal of a unified tariff at a rate between five and ten percent. The ten to 20 percent range leaveshigh effectiveprotection for activitiesof low value-added(60 percent effective protection for a good with 20 percent domestic content, which might be found in assembly industries). Further, it would mean that Venezuelanconsumers would pay prices 20 percent above world levels for many items, and it would continue to encourage investment in low value-added, inwardly-oriented industries. If Venezuelan industries are to be competitive in wor!d markets, they must also be competitiveat home, and the surest way of accomplishingthat would be to eliminatetariff protectionso that investmentwould be directed to those activitieswhere Venezuelawould be most competitive.
4.24 Finally, it shouldbe kept in mind that to the extent the Governmentmay consideractive promotionof selected economicactivities, direct production subsidieswould always be more efficient instruments than trade interventions. Trade interventionsdistort both production and consumption decisionswhereas productions subsidies distort only productiondecisions. "ome believe that production subsidies are too costly because they show up in the budget whereas trade interventions do not. However, the trade intervention-withthe double distortionwill alwaysbe more costly, so it followsthat if budget subsidiesare too costly, trade interventionsshould not even be contemplated.
4.1.5 Exemptions
4.25 Discretionary tariff exonerations have been eliminated. However, there remain exemptions,established by law, for some entities such as state-ownedenterprises, universities, and the central government. The DevelopmentMinistry does not know all the entities which are entitled to exemptions,but it has estimatedthat they affectedless than three percent of imports in 1988.
4.26 Legislationshould be introducedto eliminatethese exemptions. Where the exemptions are offered to domestic enterprises, they allow an unfair commercialadvantage. The exemptionsare leakages in the system of protection-allowing foreign producers preferential treatment for some customers-which should be eliminated. The decision to grant protection to domestic manufacturersis a policy decision that consumersof an item should bear the cost of developingthat activity and that the foreign manufacturer should not enjoy a price advantage. To exempt some consumers from that protectionplaces a greater burden on others.
4.1.6 Exports and Export Subsidies
4.27 The bono de exportacldnwas introducedto compensateexporters for requiring them to surrender their foreign exchange at the official rate. While this was an inferior way of solving the original problem, it was a legitimateway. Over the years, the role of export subsidieshas been lost and the Governmenthad to fend off many spurious claimsfor exporters' right to receive the subsidy. With the unificationand floating of the exchangerate, the subsidyno longer served a legitimate purpose, and the Governmentwas correct in reducingthe subsidy and in its plans to eliminateit as soon as an effective duty and indirect tax rebate scheme is availableto exporters. [841 4.28 Manypeople point to the large, apparentincrease in exportsin 1989 (andsubsequent declineas the subsidyhas beenreduced) as justificationto re-introducethe subsidy. Whilenontraditional exportsreported by OCEI increasedby 50 percentfrom $2 billion to $3 billion, nearly half of the apparentincrease was a resultof the changein traderegime from one whichencouraged under-invoicing to one which rewardedover-invoicing (see Box 2). That is, either 1988exports were higherthan $2 billion or 1989 exportswere lower than $3 billion, or some combinationof the two. Further,the decreasein Venezuelanconsumption, the highcosts of carryinginventories, and the free-marketexchange rate all contributedto increasedexports. 4.29 It is also importantto emphasizethat the purposeof trade reformis not to increasenor to diversifyexports. Trade reform changesthe patternand level of economicactivity and, as a consequenceof increasedefficiency, each of the followingis affected: specificcommodities imported and exported;total imports and total exports; value added to exports;and thebalance of payments.These charjes are the resultsof increasedefficiency and are not goalsin and of themselves.Greater exports or exportdiversification are only desirablewbere they consistof exportsin which the countryhas a comparativeadvantage and, underthe presentexchange regime, any exportwhich requires a subsidyto be profitableis one in which the countryhas no comparativeadvantage. If the subsidyis used to encourageexports, it wouldbe a drainon the Venezuelaneconomy in the sensethat the costof producing the itemfor exportwould be greaterthan the receipts. Governmentpolicy should continue to discourage this type of expurt. 4.30 A final point. What is requiredfor the adjustmentprogram is new investmentin internationallycompetitive industries or to increasethe efficiencyof existingfirms. The exportsubsidy, while it may encourageexports from existinginventories or even export productionfrom existing capacity, is not an efficientmethod to encouragenew investmentin export-orientedindustries. Investmentis based on the underlyingfundamentals of internationalsupply and demand,aad export subsidies-whichmay be changedcapriciously or countervailedin exportmarkets-are not factoredinto investmentdecisions. And since they cannot be countedon in estimatingthe profitabilityof an investment,they would only provide windfall economic gains to exportswhich would take place anyway. 4.1.7 ExportProcessing Zones 4.31 Thereis interestwithin Venezuela in establishingexport processing zones (EPZ's). These zones are economicenclaves within which manufacturingfor exportoccurs under virtual free trade conditionsby exemptingexporters from someadministrative procedures, customs duties, and perhaps other taxes and/orlabor !dws. In theory,the countrywould enjoy gains through employment, foreign exchangeearnings, and technologytransfer. 4.32 Theseare not an effectivesolution to long-termproblems of efficientresource allocation, and will be less attractivein Venezuelaas the trade reform lowers tariffs and other obstaclesto internationaltrade. They have a mixedrecord, and Warr (1989)points out severaldrawbacks. He found,after examiningthe experiencein Korea,Malaysia, and the Philippinesthat "Whenthe domestic economyis distorted,the EPZ conferslimited welfare gains. Nevertheless,EPZ's are far from the 'enginesof development'that somecountries had initiallyhoped they wouldbecome." (p. 86). Any proposalsshould be carefullyscrutinized and the Governmentshould avoid providingany subsidies throughinfrastructure, credit, or tax concessionswhich would benefit investors at the expenseof the Venezuelantaxpayer. Fees shouldbe structuredso that all costswould be fullyrecovered. [ 85 1 4.1.8 Export Credit and Expurt Credit Insurance
4.33 In the areas of export credi. and credit insurance, the Governmentshould encouragethe developmentof private markets which couldprovide suitableinstruments. FINEXPOhas offered credit at subsidizedrates to a limitednumber of exporters. There is no justificationfor these subsidiesand they encourage many distortions in the industrial incentives (see, e. g. Fitzgerald and Monson, 1989). Exporters shouldpay market rates for credit.
4.34 Exporters have soughtgovernment subsidies for an export credit insurance schemewhich would allow them to export to risky clients in countries with poor credit records (e. g., Guyana, Nicaragua), without bearing the risk of default. The governmentshould not subsidize such programs withouta careful analysisto establishthat the benefits would exceed the costs and risks. The records of most export credit insurance agenciesare poor. More than half the agencieswhich are members of the Berne Union are running losses which will have to be repaid by the taxpayers of the exporting nation.
4.35 Insurance is an industry demandinga high degree of technical expertise and where the private sector is generally more efficient than governmentagencies-including insurance for political and commercialrisks. The governmentcan assume large, uncontrolledliabilities in the name of its citizens: The U. S. taxpayers are paying an estimated $500 billion-about ten percent of GNP-for its Federal Home Loan Bank Board's failure to charge adequaterates to insure against failures in the savings and loan industry.
4.36 In theory, there could be conditionsof market failure or imperfect informationwhich would warrant governmentsubsidies for export credit insurance. However, careful empirical analysis would be necessaryto show that those conditionsare met in Venezuela. Further, even if such conditions should be met, the most efficient form of intervention is unlikely to be government provision of the insurance. As long as there are no laws which prevent private irnsurersfrom offering export credit insurance in Venezuela, then the fact that it is not offered or is too costly most likely indicatesthat the exports involved would be too risky and should not be undertaken.
4.1.9 Public Services
4.37 It is widely believed that the private sector has adjusted to the trade reforms and that the public sector has not. Entrepreneurs point to a long list of state-owned enterprises and government services which are costly and inefficient: products of the basic industries, communications,electricity, water, shipping, ports, and customs administration. The Government has begun a program of restructuringand privatizationwhich will address these concerns, but the program is a year-and-a-half behind the trade reforms.
4.38 Some have estimated that the goods and services provided direcdy by the Government or by state-ownedenterprises place Venezuelansat disadvantagesof ten to 25 percent in exporting. We do not have independentestimates to verify the magnitudeof these distortions. However, to the extent that the goverrment taxes the industrial sector and consumersto underwrite inefficienciesin shipping, infrastructure, communications,or other basic services, the Venezuelaneconomy will be uncompetitive in traded goods. These inefficienciesare costs associatedwith Governmentpolicies, but they are real costs of importing and exporting. As long as the government continues to require exporters and importersto bear them, they will direct resourcesaway from the productionof tradable goods and toward nontradables. This, however, is a more efficient allocationin a society which delivers traded goods so [861 inefficiently. The correct policy response is not, as some have advocated,to o7fsetthese cost penalties with subsidiesbut, as the Government's restructuringand privatizationis designe1 to do, to eliminate them at the source. It is incumbenton the Governmentto place its industrialpark in a more competitive position by eliminatinggovernment-imposed obstacles and costs.
4.2 Role of the Deve ^ment Ministry
4.39 The DevelopmentMinistry has been restructured-to tne approval of the private sector- and is adoptinga role compatiblewith a more outward-orientedeconomy. The Ministryhas identified four specific institutional objectives: (a) Increased productivity, product quality, and service; (b) Increased foreign investmentand access to technology; (c) Increased capacity to monitor industrial performance in Venezuela and overseas; and (d) Stronger analytical basis to formulate policy and to identifypublic sector bottlenecksto internationalcompetitiveness. The responsibilitieswhich the Ministry must undertake can be grouped into three broad-and not necessarily mutually exclusive-categories: those which make the country internationallycompetitive and maintain a favorable investmentclimate; those which maintain and promote competitionwithin the domestic market; and those which collect, analyze,or disseminateinformation in supportof the other two. These topics are discussedin this section along with more detaileddiscussions of issues surroundingpromotion of foreign investmentand antitrust legislation-topicson which the World Bank has provided technicalassistance to Venezuela.
4.2.1 InvestmentClimate
4.40 The general economichealth and politicalstability in a country, along with resources and markets, are the primary determinants of the climate for industrial investment. In this regard, the Government's reform program has restored the attractivenessof Venezuelafor investors-both domestic and foreign. The decline of private investmentfrom 24 percent of GDP in 1971-73 to an average of six percent of GDP during 1981-86 (Cable 1.1) should be reversed. The most important measure to encouragethis reversal will be continuationof the reform program-particularly in the reform of state enterprises,public services, and infrastructure-andextension of the trade reforms. However, Venezuela, even with its rich base of natural resources and a favorable policy regime, will still compete for investmentwith other countries which are implementingpolicy reforms. There are areas where further policy changes would enhanceVenezuela's internationalcompetitiveness:
* Tax Reform. Tax rates on corporateprofits are higher in Venezuela(50 percent) than in many other countries (Section 2.3.3). Legislationto reform the tax system (broadeningthe base and lowering rates) and to reduce the maximum rate for corporate profits to 35 percent, has been submitted to Congress but, until it is passed, investors will defer decisions in cases where this would make a difference.
* LV QLegishn. Labor laws intrude heavily into employee and managerialfreedom to negotiate terms and conditionsof employment. Labor legislationcan be an instrumentto ensure that labor is allocatedefficiently to increase productivityand employment. Where it is used instead as a "social safety net" for purposes of maintainingor redistributingincome, it will distort labor market decisions and reduce employment. While income maintenanceand social welfare are legitimateobjectives of social policy, labor laws are usually inefficientways to achieve those ends. Existing legislation imposesrequirements which make Venezuelanlabor less competitivewith other nations'. [87 1 There are many drafts of legislationunder consideration(Section 3.2). While some of these reforms could reduce the problems which add unnecessary costs and discourage employmentin the formal sector, other drafts would make Venezuelaeven less competitive. Until laws are revised to restore market freedoms, while protecting legitimate worker rights, Venezuela will operate at a handicap. Less investmentwill be attractedand that which is attractedwill be more capital intensiveand create less employment.
* Training and Education. The qualityof the labor force is as importantto investors as the price. The National Training Institute (INCE) and the public education system needs to implementprograms which will more efficiently piepare Venezuelan labor for employment in modern industrial occupations. The Governmentis implementingprograms to address shortcomingsin both area.
* Technology. Technolugy transfers have been inhibited by policies which discouraged foreign investmentand by import restrictionson capital goods. These policies have been reformed, and the Development Ministry should ensure that no other government policies-such as patent laws-will continueto inhibit introductionof state-of-the-arttechnology in Venezuela.
4.41 These policies serve many purposes besides fostering investment, and are beyond the limited responsibilityof one Ministry. However, an appropriate role for the Development Ministry should ensure that no decision is taken on them without the Executive's being fully aware of the implications,with the Ministry acting as the advocate for those policies which will foste. investment, growth, and development.
4.2.1.1 InvestmentPromotion
4.42 The change in economicincentives under the reform program creates opportunitiesfor profitableinvestment in export-orientedand efficientimport substitution activities in 'enezuela. The new incentives, coupled with new foreign investmentregulations, will attract foreign investorm.Success of the reform program would be reinforced by early investmentto take advantage of these opportunities. The Governmentis seekingmethods to promote these opportunitiesdomestically and internationally. To avoid wasting resources and manpower,investment promotion must be carefully tailored to Venezuela's situation in light of current internationalpractices. (See Wells and Wint, 1990).
4.43 It is often assumedthat investmentpromotion-which has some aspects of a public good in that it is not always easy to identify the beneficiaries and to charge them directly-is a legitimate governmentalfunction. In fact, there are identifiablebeneficiaries of foreign investment,and promotion is in their interest: chambers of commerce, banks, labor groups, potential suppliers, owners of complementarylines of production,or domesticinvestors seeking foreign partners. Many of these groups are already promoting investment. Further, even if there is an additional benefit which would justify governmentsupport, it may be that the activity would best be provided by private interests enjoying partial or complete financial support from the government. The first decision, then, must be whether investment promotion would most efficiently be implemented by a public, a private, or a mixed institution. This decision must also be influencedby the types of personnel required to staff the agency. Governmentsalary limits discourage well-trainedprofessionals from pursuing a governmentcareer, so attention must be paid to ensuringthat the organizationcan be effectivelyadministered.
4.44 Investmentpromotion is a long-termactivity whichwould be more successfulwith stable, predictablefiuding. The necessaryfunding can be estimatedrelative to the experiencesof other countries [ 88 1 and the tasks and strategiesthe sponsors adopt. Typically such agenciesmay employ staffs of five to 35 people with annual budgets of roughly $300,000 to $4 million. One activity which the agency must decide is whether to establish and maintain overseas offices. The experience of other countries in this area has been mixed and, ultimately, it is an empiricalquestion of projectingthe costs and the benefits.
4.45 The organization design must be related to concrete measures of performance and accomplishmentwhich are r,ecessaryboth to demonstrateeffectiveness to sponsors and for management to measure and improve its own effectiveness. Alternativeperformance measures include: number of investor inquiries, frequency of promotionalpresentations, amount of investmentattracted, number of jobs created, etc. In choosing among measures, it is importantto distinguishbetween input measures (hours worked, trips taken, etc.) and output measures (employmentcreated, dollars of new investment). While the former are easier to measure and control than the latter, they give little indication of the organization's effectivenessand no justification for expandingor even continuingthe program.
4.46 The agency must find a suitable mix of promotionaltechniques. These may be "image building"--to improve potential investors' understanding of programs and opportunities; "investment servicing"-- to assist existinginvestors; or "investmentgenerating" -to attract and service new investment. Most countries employ all techniquesbut emphasizeone ahead of the others, shifting emphasisover time as strategieshave evolved.
4.47 Given the agency's budget, it must concentrateresources in areas and sectors with the greatest potential yield--as measured by the performance targets. The agency must strike a balance between promotingin sectors capableof attractinginvestment on their own (and where !he agency's work would have no marginalcontribution) and sectors in which investmentmay be inherentlyunprofitable and unsuitable. Here promotion,if it were successful,would actuallybe costly to the investor, the country, or both. The same considerationsapply to selecting foreign countries where prcomnotionwould be most successful. However, it would be impossiblefor an agency such as this to predict trends and to identify a country's comparativeadvantage-particularly when economicincentives are changingso sharply under the Government's reform program-and the agency should not concentrateits resources too narrowly in an attempt to second-guessthe market.
4.48 Finally, the agency will need an appropriateinformation system. Investmentpromotion takes time to realize results. From initial contactsto a favorable investmentdecision demands that the agency keep careful records of activitiesand informationand that it maintain timetablesto ensure that follow-upactions are completed. Computerizationof appropriateinformation, tracking, and management systems would be desirable.
4.49 Essential to the success of these activities is a sound reform program which ensures favorable investmentconditions. Foreign and domestic investors alike are interested in the underlying economicfundamentals: tax and labor laws, the fiscal deficit, exchangerate policy, inflationrates, costs and quality of local services. No investmentpromotion agency can convince investors to put resources into an economy which is inherentlyunprofitable. Conversely, investorsare continuallyon the search for profitable opportunities and stand to gain as much from investmentas the host country. If the conditionsare sufficientlyattractive, investmentwill come, and the promotionagency can only hope to make it come more rapidly. [ 891 4.2.2 Promotionof Competition
4.50 In a small economy like Venezuela's, the principal source of competitionis the world market, and the Development Ministry will maintain a responsibilityfor continuingthe tariff reform. However, In nontradedgoods, different conditionsare necessaryto maintain a competitiveenvironment. The Ministry will be responsiblefor policiesof patents and copyrights,product standards, weights and measures, consumer piotection, and antitrust.
* Patents and Copyrights. Venezuela's laws of intellectualproperty rights have been criticized for not protecting pharmaceuticalsor chemicals, for their limited terms (five to ten years compared to the international norm of 17-20 years), for discouraging domestic research and innovation, and for deterring investorsfrom introducingadvanced technology (which would not be adequatelyprotected). This has been a contentious issue because the lack of patent protection has enabled domestic pharmaceuticaland chemical manufacturersto enjoy the benefit of foreign innovationwithout paying royalties. Legislation has been drafted to increase protection of intellectual property rights in Venezuela, and the Development Ministry should take an active role in identifying and advocating appropriatechanges in the law.
* Product Standards.Weights and Measures. These topics relate to establishingand enforcing the rules of an environment in which competitors are on an equal footing. The most problematic area is in settingproduct standards. Local manufacturerswili press to enforce standardsand definitionswhich would place foreign producers at a competitivedisadvantage. The DevelopmentMinistry, in ruling on appropriate standards, should look abroad toward international norms which would maximize domestic competition. This would be of the greatest benefit to consumerswho would have greater selectionand to domesticproducers who, by adaptingto internationalnorms would be able to compete in world markets.
* Financial Sector. An efficient financial system is essential to match borrowers and lenders in order to facilitatesavings and investmentand permit an efficient allocationof resources. The Government's financial sector reforms should reduce the policy-induced obstacles to mobilizing resources for industrialdevelopment. Liberalizing interest rates should increase the supply of credit available to qualifiedborrowers. Measuresto reduce the subsidy in interest rates and rationalizethe development financial institutionswill ensure that credit is available at lower rates for most economic purposes. Foreign competitionin the financial sector should promote the introductionof modern banking and financial practices and instrumentsand reduce the spreads charged by financial intermediaries,to the benefit of both borrowers and lenders.
The DevelopmentMinistry should monitor these reforms to ensure that they will encourage a more competitiveenvironment and avoid the mistakes of the 1980s. In particular, it should, with other responsible Ministries and the Central Bank, evaluate the feasibility and benefits of opening commercialbanking to greater foreignownership. Under the financialreform program, legislationwill be introducedto permit 20% foreign ownership of commercial banks, with the National Executive given discretion to increase it to 30%. It is likely that the national interest would be served by increasingthese limits.
* MaximumRetail Price. The consumerprotection law requires--amongother things-that manufacturers set a maximumretail price (precio de venta at piblico, PVP). Retailersmay sell merchandisefor less than the PVP (and often do), but they may not sell it for more. [90] It is not clear under what conditionsthe PVP protects consumers. If the distribution system is competit. e, then it would fix a retail price no higher than necessary to return a normal profit- presumably the same price that a manufacturerwould wish to set. If distribution is not competitive, then distributors could dictate the retail price to the manufacturer, but they would dictate the same price that they could charge using their market power. If there is a problem due to imperfect competition,it could not be remediedthrough the PVP-antitrust legislationwoula be necessary.
The PVP could be costly to retailers in times of unanticipated inflation if it prevents them from receiving an adequateprofit margin. It is costly to mannfacturerswho must purchase new packaging materials each time their costs increase. In both cases, the costs would be passed on to consumers. The requirementthat manufacturersmark a PVP on their product shouldbe replaced with a provision which allows them to fix a PVP if they wish. v Banknrutgy. An importantelement of vigorous market competitionis the exit of firms which are no longer competitive. This frees human and enital resources to move to more dynamic, expanding activities and leads to a stronger, more competitiveeconomy. The DevelopmentMinistry should ensure that bankruptcy regulations and procedures are consistent with best internationalpractice to facilitate and encourageefficient resource reallocation. d Reformingthe FIV. The state owned enterprises have been at a competitiveadvantage vis-a-vis the private sector because of the benefits provided through the FIV. The Government has introdsuced legislationto change the role of the FIV, involvinga phased withdrawal from direct lending and investmentin SOEs(after meetingcurrent obligations)and refocussingits activity towardsprivatization (as the implementingagency for the Government's privatizationprogram). At the same time, the Governmentis taking steps to reduce direct budgetarytransfers to SOEs. The phasingout of FIV and Governmentfinancial support for SOEs will help to ensure greater financial discipline on SOEs and permit more robust competitionbetween private and public companies
4.51 The strongest form of consumer protection would come from vigorous, competitive markets. As tariffs are reduced, internationalcompetition will lower the prices of traded goods and drive producers' prices toward internationallevels. For domesticdistribution and for other nontradedgoods, it may be desirableto rely on antitrst legislationto enforce competitivenorms and behavior.
4.2.2.1 Antitrust Legislation
4.52 Goals and Policies. Venezuelahas no antitrust law. In the 1980s, the Development Ministry was able to control virtually every aspect of entrepreneurialdiscretion, but in today's market- oriented economy, antitrust could be a valuable part of the legal framework. Properly conceivedand executed, it could promote competition,inhibit collusion,and discourageor p.event monopolyin order to encouragegreater efficiency, improved uses of resources, superior performance, and lower prices.
4.53 There are at least three possible goals of antitrust policy and they may be mutually incompatible. First, antitrust could be focusedon promotingan efficientand competitivemarket system. Second, antitrust could have a more populist orientation.and be focused on preventingthe development of large enterprisesor agglomerationsof capital and wealth, regardlessof the consequencesfor efficiency and competition. Third, antitrust could focus on ensuring 'fairness" in the marketplace. If larger ent&prisesare more efficient and can compete in a superior manner in the marketplace,a populistpolicy that prevents their development will conflict with the first goal. If the pursuit of efficiency causes an [91] enterpriseto treat some customers or suppliers in a disparate fashion and to discrimnnateamong them, a policy that emphasizesfairness would conflictwith the first goal.
4.54 Advocates of antitvust have often failed to distinguish the three goals and have not recognized these incompatibilitiesand the importanceof informed selection among them. The choice among policy goals is ultimately a political decision, but economic efficiency is an important goal of many Venezuelan econcmic policies, and it is assumed here that the promotion of efficiency and competitionis the primary goal of antitrustpolicy as well.
4.55 In a marketthe size of Venezuela'sthe most importantinstrument of economicefficiency is an open internationaltrade and investmentregime so that foreign producers can compete with local enterprises that would otherwise exercise power in domestic markets. An open trade and investment regime, however, is not a complete substitutefor an antitrust policy: First, competitionfrom abroad cannot occur instantly. Second, traded goods must be distribu' d domestically,which means that non- traded domesticdistribution services are a potential impedimentto competitionfrom abroad. And third, import competitionfrom abroad may be ineffectiveor non-existentfor goods that bave a high ratio of transportationcosts to values (e.g., cement, metal ores) or that are perishable (e.g., fresh fruits and vegetables,fresh dairy products) and for most services, which are inherentlynon-traded.'
4.56 Services are important. Though much attention is focused on manufacturing,the output of services exceeds manufacturingoutput in most economies. For Venezuela, in 1986 manufacturing (excludingrefining) accountedfor 16 percent of GDP. By contrast, wholesale and retail distribution accountedfor 12 percent of GDP, transportationand communicationsfor 13 percent, financial services for 17 percent, constructionfor four percent, and other (persoaal) services, five percent. The total of these services was approximately 50 percent of GDP, or over three times the contribution of manufacturing.
4.57 There are, however, risks to an antitrustpolicy as well. An overzealous,poorly focused, or poorly administeredpolicy could impedeeconomic efficiency and harm growth and development. This could arise a number of ways: Entrepreneursmay not expand into iew markets or new fields if they fear antitrust prosecution; they may be inhibited from developing efficient distribution or supplier arrangementsor relationshipsbecause of misguidedantitrust policiLsthat might protect distributors or suppliers; or they avoid investments because of erratic antitrust enforcement. Accordingly, the Governmentmust not only develop good, effectivelyadministered antitrust policies, but also avoid the pitfalls of poor policies.
4.58 Though antitrust, when properly carried out, is distinctly pro-consumer, it should be consideredand administeredseparately from other consumerprotection laws. Most consumerprotection focuses on fraud, standards, health, and safety. These are not inherently related to monopoly or competition,but to deficiencies in informationabout the goods or services. Their solutions, and the enforcement,are different from antitrust and are best handled by differnt laws and administration.
'Fornon-taded goods and for somesevices, foreigninvesment may provide competition. This is likelyto be truefor financialservices, professional services, transportation, and largscale constuction;it is Iss likelyto be tme for wholesale andretail ditibution srvices,personal svices, and small-scaleconuction. [92 1 4.59 Antitrust should also be separated from anti-dumping. There is a surface similarity between one strand of antitrust, "predatory" pricing by a dominant firm, and dumping: Both involve claims that sellers are pricing beiow "cost." But *.e remainder of antitrust has iittle connection with dumping. Further, dumpinginvolves claims against foreign producersand internationalnegotiations and treaties. The methodsof investigationand evidentiaryburdens often differ. Finally, if predatory pricing is a problem, it arises becausea firm is trying to create or buttress a monopolisticposition. By contrast, it is rare that claims of monopoly have any empiricalvalidity in dumping; rather, the major complaint is usually that foreign governmentsare subsidizingtheir exporters or othermise causing goods to flood the domesticmarket. The enforcementof anti-dumpingstatutes, because it means protectionfor domestic producers and higher domestic prices, is almost always anti-competitiveand against the interests of consumers.
4.60 Some General Principles. Antitrust is a set of policiesthat are pro-competitionand pro- efficiency. In many instances, competitionand efficiencyare mutually consistent. Where markets are competitive,prices in the long run are likely to reflect the costs of production (including a normal, competitiveprofit on the capital invested), and consumerdemands will be satisfied through an efficient allocationof resources. Competitivepressures will motivate entrepreneurs to find new methods and technologiesto reduce their costs and to develop new or improvedproducts and servicesthat better meet consumerdemands. Conversely,a monopolist(or a group of competitorsthat coordinatesits actions to behave like a monopolist)will tend to restrict output and maintainprices above costs (earningmonopoly profits), thereby inducingan inefficientsatisfaction of consumerdemands. Further, the monopolistdoes not fear the pressures of competitors and thus does not have that spur to improving efficiency, discovering new methodsor technologies,or developingsuperior products.
4.61 Competition and efficiency conflict where the efficiency advantages to large scale production extend over the entire range of output encompassedby the market. These economiesof scale can arise in core production activities(e.g., chemicalproduction; beer brewing; electricity generation) or in ancillary services and distribution (e.g., chemical sales; beer delivery and distribution; retail electricityservice) or both. This is a natural monopoly. Any effort strictlyto prevent a monopolywould entail a loss of efficiency, since multiplefirms wouldhave higher costs than the single (larger) enterprise. And any such effort would probably be unsustainable,since a larger firm in this market could always charge lower prices (while earning an adequateprofit) than a smaller firm.
4.62 Greater overall efficiency does not automaticallyaccompany larger output. For many technologies, processes and services, the difficulties of maraging a large-scale enterprise and of respondingquickly to changingdemands outweigh the technicaladvantages that might accompanylarger volumes. In such situations, large-scale enterprises are likely to be Id efficient than smaller firms. Accordingly,the relative efficiencyof small- and large-scaleenterprises is always an empiricalquestion that can only be answeredfor the specific market circumstances.
4.63 A systemof price and/or profit regulationis one way to treat a natural monopolythat is often chosen in the area of public utilities (e.g., electricitydistribution, local telephone service). Like consumer protection and anti-dumping, such formal eonomic regulation has a different conceptual frameworkand is best kept administrativelyseparate from antitrust.
4.64 Antitrust can still encouragecompetition in the presence of natural monopoly (whether regulated or not). By discouragingpractices that raise barriers to entry or raise the costs of rivals, antitrustcan limit a natural monopoly'smarket power. Further, if the economiesof scale are exhausted at, say, one-half or one-third the market, a few firms can operate efficiently. Antitrust can encourage competitionand efficiency in this structure ("oligopoly"),by preventingcollusion. [93 1
4.65 Effortsto providedetailed checks on abusesof marketpower are fraughtwith difficulties. Thedanger is that efficient,competitive behavior will be discouraged.For example,if a dominantfirm respondsto a competitivechallenge by cuttingits prices, this price-cuttingmay be interpretedas predatuir behavior;but it could also be normal,aggressive competition. should this responsebe discouraged?If a firm thattis dominantin one marketchooses to enter a new marketby offeringlower prices in that new market, this pattern of chargingdifferent prices to differentcustomers ("price discrimination")is oftentreated as an unfairor anti-competitivepractice; but the firm's entrvinto the new marketis clearlypro-competitive. Should this be discouraged?Overly-zealous restrictions could become a protectivescreen for inefficientrivals rather than encouraging competition and efficiency. 4.66 Finally,there is an areaof arrangementsbetween suppliers and customers termed "vertical restraints,"that sometimes appear to impedecompetition and haveoften been targets of antitrust. These arrangementsencompass instances, for example,where a supplier(e.g., a manufacturer)restricts the areaswhere distributors may sell, the typesof customersto whichthey may sell, the servicesthey must provide,the itemsthey must carry, and/or their retailprices. A manufacture.may insist that distributors handleits productsexclusively; or a distributormay insist that the manufacturerdeal exclusivelywith it and not sell throughrivals. Finally,a manufacturermay insistthat certaingoods or servicesbe "tied" to the saleof its primaryproducts. 4.67 Such verticalrestraints have a similarityto price-fixing,output restrictions, or market allocationswhen done by competitors. And, in some instances,these restraintscover a collusive arrangementamong competitors, at the distributoror the manufacturerlevel; or they maybe an effort to raisebarriers to entry or the costsof production(or distribution)by rivals. On the other hand,these restraints,imposed by the manufacturer,are oftenmeans of dealingwith "free-rider"problems or other inefficiencies.For example,a frequentpractice is to assignsales territories to separatedistributors. Each distributorcan focus its advertisingand promotionon its territory and without fearing that other diatributorswould benefit from its efforts. Such restraintsare usuallypro-competitive because they ennancea manufacturer'sability to competewith its rivals by offeringa distributionmethod that it believesto be superior. Equivalently,it is achievingthrough a contractualarrangement what it might otherwiseachieve through vertical integration and distributingthrough its own facilitiesand employees. 4.68 Instruments.Antitrust encompasses a widerange of businesspractices and arrangements that couldrequire scrutiny. It is possibleto implementa minimalistframework or, dependingon legal and administrativecapabilities and choicesamong policy goals, to expandthat framework.It wouldbe possibleto havea bare-bonesantitrust policy that focused exclusively on price-fixingand otherrestrictive practicesamong competitors. This is wherethe socialharm is clearestand wherethe needto consider offsettingefficiencies is negligible. 4.69 Beyondthis, it wouldbe possibleto add layersto: preventpractices that raisebarriers to entry or raise costs to rivals;prevent mergers or joint venturesthat wouldcreate or enhancemarket power; prevent predatorypractices or other abusesof a dominantfirm's power; break up existing monopoliesby divestingfacilities. These layers require increasingly complex considerations of offsetting efficienciesand of the trade-offsbetween the socialharms fromthe peosible exerciseof marketpower and the socialgains from the possibleefficiencies; they wouldrun greaterrisks of inhibitingefficiency and competitionitself; and, in any event,they would require a largerand moresophisticated enforcement agency. 1941 4.2.3 Jnfim aUa Rd.mh
4.70 Tbe Governmenthas not been an active producer, disseminator, sponsor, nor user of research and infbrmation. As a result, policy decisions and laws have often been based on good intentions' - hasty generalizations. This report has shown many examplesof why good intentionsare not sufficientto choose among policy alternatives. Policy in the 1990s should be informed by reliable, timely inwrmationwhich has been carefidlyanalyzed to elevateand inform the policy debate and to avoid future mistakes.
4.71 The Development Ministry should undertake a systematic inventory of the economic information and systems available in Venezuela and in other countries and should develop recommendaJonsto improve the qualityand availabilityof reliabledata, and ensure that they are gathered and disseminatedin a cost-effectivefashion. Without such data it is impossibleto measure the effects of any policy, much less to approximate the effects of alternative policies. In this regard, the DevelopmentMinistry should continue to give priority to computerizingits own records and making these available to researchers who would be interestedin measuringthe effects of the policies and economic decisionsmade during the 1980s. The Ministry itself does not have sufficientresources to analyze these data, but they would be of interest to an internationalbody of scholars interested in understandingthe effects of Venezuelanindustrial policy during the 1980s.
4.72 With reliable, timely data, the Government can undertake or sponsor suitable policy analyses. The DevelopmentMinistry should encourage research in support of legislationand regulations which would lead to a more attractiveinvestment climate and more competitivemarkets. The Ministry should continue to increase its ability to undertake sophisticatedanalyses which can provide a more reliable basis for policy decisionson the agenda outlined in this chapter. In the interim it can encourage economicresearch directly throughconsultants and indirecdythrough providing informationand a forum for economicdebate.
4.73 The level of economic discourse in Venezuela is low relative to its economic sophistication. For example, there are no journals of economicswhere scholars can debate economic goals, policies, and their consequences. Economicideas are largely debated in the popular press or in a few specializedperiodicals. While the Goverment would not be a suitable body to sponsor such a journal, it could consider making a direct grant to an appropriateacademic institutionto underwrite an experimentalfiveyear publication.
Fcbngr 12, 1W 4:52 5 APPENDiX
Tabb A.2.1: Diuribudomof S1 (ERrbu_nPmem) by State, 1,7548.
SOTe ~197S 1977 1979 1211 94 1986 1988
Federal 18.9% 17.9% 16.7% 15.8% 11.6% 10.9% 10.3% Carabobo 22.3 20.9 21.7 21.8 22.1 21.1 22.2 Miranda 21.3 24.1 20.8 21.0 18.9 18.9 20.0 Aragua 14.1 14.5 1S.1 12.S 14.5 14.4 16.7 Zulia 7.3 6.6 7.9 8.1 8.3 8.3 7.8 Bolivar 4.4 3.8 5.2 6.S 9.6 10.1 7.7 Lam 2.8 3.3 3.8 4.4 4.6 4.7 4.6 Anzoategui 2.1 2.2 2.5 2.2 2.3 2.4 2.2 Suer 0.9 0.8 0.8 0.8 0.9 1.7 1.8 Tachira 0.9 1.1 1.2 1.8 1.5 1.6 1.4 Portuesa 1.0 0.9 0.6 0.8 1.0 1.3 1.1 Yaracuy 1.3 1.2 1.0 1.0 1.1 1.2 1.1 Merida O.S 0.6 0.7 0.9 0.8 O.S 0.6 Guarico 0.6 O.S O.S O.S O.S 0.6 O.S TrujiUlo 0.4 0.4 0.4 0.5 0.7 0.6 0.5 Falcon 0.3 0.3 0.2 0.4 O.S 0.6 0.4 Barinas 0.4 0.3 0.2 0.2 0.3 0.3 0.3 Cojedes 0.2 0.2 0.2 0.3 0.4 O.S 0.3 Monagas 0.2 0.2 0.3 0.3 0.3 0.3 0.3 NuevaEsparta 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Apure 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Amazonas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Delta Amw-uro 0.0 0.0 0.0 0.0 0.0 0.0 0.0
-B.c ocEI. [961
Tabl. A.22: Prie-.Cost MNrxghBy Sector.
Difference 1975 192S 19I8 (1988-197S1
311 FoodProducts 21% 18% 17% -4% 312 Food Products, n.e.s. 20 18 21 1 313 Beverages 53 47 S0 -3 314 Tobacco 56 76 73 18 321 Textile 29 23 25 -5 322 Apparel 20 20 19 0 323 LeatherProducts 27 26 16 -11 324 Footwear 16 22 17 1 331 Wood Productd 26 22 24 -2 332 Wood Pumiture 21 21 18 -3 341 Pulp, Paper 32 25 26 -7 342 Printing 26 24 24 -z 351 IndustrialChemicals 30 38 29 -1 3S2 Drugs, Cosmetics 37 36 34 -2 353 PetroleumProducts, Refining 52 S0 38 -14 354 Petrol, Coal 37 26 31 -6 355 RubberProducts 37 32 37 0 356 Plastic Product 33 29 25 -8 361 Pottery, Ceramics 35 46 43 8 362 Glass Products 41 35 25 -16 369 NonmetallicProducts, n.e.s. 34 38 29 -5 371 Iron, Steel, Basic Metals 37 27 28 -9 372 Non-Ferrousmetals 29 23 34 4 381 FabricatedMetal Products 27 29 24 -3 382 NonelectricMachinery 22 22 29 7 383 ElectricMachinery 26 22 30 4 384 Transport Equipment 17 19 16 -1 385 ScientificEquipment 30 39 26 -4 390 Other Manufacturing 29 24 29 0
AVERAGE 31% 30% 29% -2%
Sa: OCE. [97 1
Table A.23: International Comparison of Price-CostMargins, M85.
Venezuela Chle Colombia (1) (2) (3) (1)-[(2)+(3)]12
311 Food Products 17% ..% 21% 7% 312 Food Products, n.e.s. 18 27 17 -4 313 Beverages 48 42 38 8 314 Tobacco 77 81 34 19 321 Textiles 26 31 24 -2 322 Apparel 19 33 14 -4 323 Leather Products 20 25 8 3 324 Footwear 17 28 14 -4 331 Wood Products 23 36 24 -8 332 Wood Furniture 21 26 13 2 341 Pulp,Paper 27 41 18 -3 342 Printing 22 36 24 -8 351 IndustrialChemicals 31 38 19 3 352 Drugs, Cosmetics 34 39 24 3 353 PetroleumProducts, Refining 66 14 59 354 Petrol, Coal 26 36 23 -4 355 Rubber Products 31 33 24 3 356 Plastic Products 27 33 1S 3 361 Pottery, Ceramics 39 25 26 13 362 Glass Products 32 51 31 -9 369 NonmetallicProducts, n.e.s 31 44 31 -6 371 Iron Steel Basic Metals 29 32 17 4 372 Non-FerrousMetals 31 49 23 -S 381 FabricatedMetal Products 25 26 18 3 382 NonelectricMachinery 27 12 17 12 383 ElectricMachinery 25 38 21 -5 384 Transport Equipment 15 22 7 0 385 ScientificEquipment 8 36 34 -27 390 Other Manufacturing 29 31 31 -2
AVERAGE 29% 33% 21% 2%
Sou: OCI. [98]
Table A.2.4: Growth of nufacturing Value-Added.
1975-79 1979-83 1983-88 1975-88
311 FoodProducts 4.4% 5.6% -0.9% 2.7% 312 FoodProducts, n.e.s. 9.3 1.8 14.8 9.0 313 Beverages 12.7 8.0 0.3 6.4 314 Tobacco 16.1 0.0 -0.5 4.5 321 Textiles -3.3 -2.9 3.5 -0.6 322 Apparel 0.3 6.2 2.6 3.0 323 Leather Products 4.6 -1.0 -0.2 1.0 324 Footwear 16.4 7.3 -2.4 6.1 331 Wood Products -0.4 -4.8 -2.5 -2.6 332 Wood Purniture 8.4 1.5 -7.4 0.0 341 Pulp, Paper 3.1 -2.6 4.3 1.8 342 Printing 12.5 0.0 -2.2 2.8 351 IndustrialChemicals 10.6 12.1 1.6 7.5 352 Drugs, Cosmetics 15.5 -4.8 5.1 5.0 354 Petrol, Coal 14.2 -92.3 574.6 -1.2 355 Rubber Products ' 0.0 -25.9 49.1 6.3 356 Pastic Products 14.1 -18.1 20.8 5.3 361 Pottery, Ceramics 14.1 52.8 -29.6 3.7 362 Glas Products 9.6 -21.0 24.7 4.1 369 Nonmetalic Products,n.e.s. 6.8 -27.5 34.1 3.5 371 Iron Steel Basic Metals 2.1 -9.9 14.4 2.6 372 Non-FerrousMetals 15.0 25.6 -10.1 7.5 381 FabricatedMetal Products 22.2 -3.1 4.2 7.0 382 NonelectricMachinery 17.7 16.0 -12.2 4.7 383 ElectricMachinery 10.8 6.0 8.1 8.3 384 Transport Equipment 6.2 -15.3 11.4 0.9 385 ScientificEquipment 32.3 99.2 -38.5 11.8 390 Other Manufacturing 3.1 -12.3 21.1 4.4
Sk: OCEZ. [99 1
Table A±5: Intuaoa o o of Export Orientadon, 19.
Venezela Colombia hl
311 Food Product 0.5% 4.1% 312 Food Products, n.e.s. 0.0 .. 6.9 313 Beverages 0.0 0.1 5.8 314 Tobacco 4.7 0.4 321 Textiles 0.9 S.9 1.9 322 Apparel 0.1 10.9 0.5 323 Leather Products 0.0 26.7 0.2 324 Footwear 0.1 9.4 0.2 331 Wood Products 0.0 14.3 19.2 332 Wood Fumiture 0.0 6.7 2.4 341 Pulp, Paper 4.2 3.4 37.8 342 Printing 0.1 13.3 3.4 351 IndustrialChemicals 13.3 5.8 48.8 352 Drugs, Cosmetics 0.2 .. 0.6 353 PetroleumProducts, Refining 62.6 46.8 1.1 354 Petrol, Coal 10.9 5.1 0.9 355 Rubber Products 0.0 1.5 1.9 356 Plastic Products 0.7 2.1 0.1 361 Pottery, Ceramics 4.0 5.1 4.9 362 Glass Products 0.9 4.5 1.5 369 NonmetallicProducts, n.e.s. 11.2 5.1 0.0 371 Iron, Steel, Basic Metals 27.9 10.9 6.9 372 Non-FerrousMetabs 51.5 16.5 72.3 381 FabricatedMetal Products 12.4 4.1 2.4 382 NonelectricMachinery 2.3 7.0 5.2 383 Electric Machinery 8.4 3.5 1.4 384 Transport Equipment 0.8 1.2 11.6 385 ScientificEquipment 0.2 9.3 8.2 390 Other Manufacturing 0.3 20.9 1.0
SacC: oceW. [1001
Table A.2.6: Employmentby ManufacuringSubsector, 1975-1988.
1975 1979 1981 1983 1985 198 Non-Durable Consumer Goods:
311 Food Products 50,097 67,408 62,756 67,780 69,793 77,675 312 Food Products, n.e.s. 4,637 6,017 6,729 6,235 7,530 8,286 313 Beverages 10,317 15,479 15,945 16,239 14,951 15,565 314 Tobacco 2,959 4,271 4,116 3,529 3,789 3,378 321 Textiles 28,524 30,969 20,754 21,169 24,595 29,791 32, Apparel 23,699 29,079 30,467 28,425 29,744 32,196 324 Footwear 11,029 16,865 17,588 16,832 15,243 18,381 342 Printing 12,699 17,282 16,958 17,461 16,762 18,950
Intermediate Goods:
323 Leather Products 3,082 4,005 3,478 3,810 3,770 4,544 331 Wood Products 8,348 8,938 7,213 6,671 7,003 7,817 341 Pulp, Paper 10,354 14,527 13,059 10,856 12,264 13,513 351 IndustrialChemicals 6,284 8,572 8,424 10,185 10,345 11,735 352 Drugs, Cosmetics 17,751 26,693 25,699 23,499 24,584 27,424 354 Petrol, Coal 399 876 736 926 998 670 355 Rubber Products 6,035 6,842 5,371 4,870 5,283 6,173 356 Plastic Products 11,594 17,844 17,781 17,364 18,828 23,141 361 Pottery, Ceramics 1,742 2,579 2,825 2,071 1,910 2,663 362 Glass Products 4,320 6,598 4,671 5,511 5,675 7,089 369 NonmetallicProducts, n.e.s. 5,256 23,843 19,338 18,874 18,647 23,198
Durable Consumer Goods:
332 Wood Furniture 12,083 16,312 13,094 15,002 12,860 13,364 383 Electric Machinery 11,587 16,678 14,798 14,215 13,620 19,424 384 Transport Equipment 19,187 28,225 23,113 21,911 20,526 23,642 385 ScientificEquipment 887 1,665 1,642 1,754 1,946 2,430 390 Other Manufacturing 3,880 4,665 4,234 3,963 4,775 6,422
Capital Goods and Basic Metals:
371 Iron, Steel, BasicMetals 15,649 27,281 25,775 28,475 25,194 30,491 372 Non-FerrousMetals 2,771 6,911 7,024 8,902 9,746 13,146 381 FabricatedMetal Products 22,033 41,147 31,427 30,809 27,698 34,848 382 Non-electricMachinery 7,509 15,603 14,677 13,401 11,426 14,145
353 PetroleunmProducts, Refining 4,688 5,777 6,978 6,871 6,4SS 6,981
TOTAL 329,460 472,9S1 461,869 427,610 42S,918 497,082
SourCmOCEI. BIBLIOGRAPHY
Bates, Robert H. (1981) Markets and States in Tropical Africa. Berkeley: University of California Press.
Balassa, Bela (ed.) (1989) Subsidies and CountervailingMeasures: Critical Issues for the Uruguay Round. Washington: World Bank DiscussionPaper number 55.
Blomstrom,Magnus, Irving Kravis and Robert Lipsey (1988) "MultinationalFirms and Manufactured Exports from DevelopingCountries", NBERWorking Paper 2493.
Bourguignon,Francois (1988) "Venezuela: Absorption without Growth." In Gelb and Associates (1988).
Collins, Susan M. (1988) "MultipleExchange Rates, Capital Controls, and CommercialPolicy." In Dornbusch and Helmers (1988).
Corden, W. M. (1984) "BoomingSector and Dutch Disease Economics: Survey and Consolidation." Oxford EconomicPapers, pp. 359-80.
Dornbusch, Rudiger and F. Leslie C. H. Helmers (1988) The OpenEconomy. Oxford: Oxford UniversityPress.
Dunning, John and John Cantwell (1985) IRM Directory of Statisticsof InternationalInvestment and Production.
Fitzgerald, Bruce, and Terry Monson (1989) "PreferentialCredit and Insurance as Means to Promote Exports." World Bank Research Observer. January, pp. 89-114.
Gelb, Alan and Associates (1988) Oil Windfalls: Blessing or Curse? Oxford: Oxford University Press.
Institutode ComercioExterior (1990) Venezuelafor Export: More than Just Oil. Caracas: processed.
Krueger, Anne 0. (1990) "GovernmentFailures in Development," Journal of EconomicPerspectives, Summer, pp. 9-23.
Meller, Patricio (1978) "The Pattern of Industrial Concentrationin Latin America", in The Journal of Industrial Economics,Sept.
Naim, Moises, (1988) "La Empresa Privada en Venezuela:Que Pasa Cuandose Crece en Mediode la Riqueza y la Confusi6n?", in Naim (1988).
Naim, Moises and Ramon Pinango (1988) El Caso Venezuela: Una Ilusi6n de Armonia. Caracas: IESA. [ 102 1 Nishimizu, Mieko, and John M. Page, Jr. (1989) "Economic Policies and Productivity Change in Industry: An InternationalComparison." Washington: World Bank, processed.
Nogues, Julio (1989) "The Experience of Latin America with Export Subsidies." in Balassa (1989).
O'Brien, Peter (1988) The AutomobileIndustry in the DevelopingCountries: Risks and Opportunities in the 1990's. London: EconomistIntelligence Unit.
Roberts, Mark (1989) "The Structure of Production in Colombian ManufacturingIndustries 1977- 1985." State College, Penn.: PennsylvaniaState University, processed.
Tybout, James (1989) "Entry, Exit, Competitionand Productivityin the Chilean Industrial Sector." Washington: World Bank, CECTP, processed.
Warr, Peter G. (1989) "Export Processing Zones: The Economicsof Enclave Manufactring." ME World Bank Research Observer, January, 1989, pp. 65-88.
Wells, Louis T. and Alvin G. Wint (1990) Marketing a Country: Promotion as a Tool for Attracting Foreign Investment. Washington, D. C.: InternationalFinance Corporation and Multilateral InvestmentGuarantee Agency.
World Bank (1988) Country Economic Report on Venezuela:Policy Choices and Economic Growth. Washington:Report No. 6711-VE, v. 1 and v. 2.
World Bank (1988a) Policy Options for Venezuela. Washington: photocopied.
World Bank (1989) Colombia: Industrial Competitionand Performance. Washington: Report No. 7921-CO.
OiAob 10 19WO 90SWP MAP SECTION 0-200 ~ AtM
ELEATONIN M' ER -
- -INTERNATIONAL BOUNDARIES V -'.
F -° - 50 < 01Dsov20
I ~ ~~~~~' - I2 (PTtOTi5