VZCZCXRO9255
RR RUEHAO
DE RUEHCV #3653/01 3532127
ZNR UUUUU ZZH
R 192127Z DEC 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7327
INFO RUEHAC/AMEMBASSY ASUNCION 0743
RUEHBO/AMEMBASSY BOGOTA 7167
RUEHBR/AMEMBASSY BRASILIA 5842
RUEHBU/AMEMBASSY BUENOS AIRES 1535
RUEHLP/AMEMBASSY LA PAZ 2429
RUEHPE/AMEMBASSY LIMA 0684
RUEHMN/AMEMBASSY MONTEVIDEO 0891
RUEHQT/AMEMBASSY QUITO 2519
RUEHSG/AMEMBASSY SANTIAGO 3846
RUEHAO/AMCONSUL CURACAO 1089
RUEHGL/AMCONSUL GUAYAQUIL 0731
RUEATRS/DEPT OF TREASURY
RHEHNSC/NSC WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE

UNCLAS SECTION 01 OF 02 CARACAS 003653 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: VENEZUELA: THE BEST IS YET TO COME 
 
 
¶1. (SBU) SUMMARY:  Two days after the Presidential election, 
the BRV instituted several changes to customs and currency 
control regulations.  The measures included a 15 percent 
luxury tariff, price controls on construction materials, and 
changes to the list of goods which qualify for foreign 
exchange.  Taken as a whole, these changes which were 
published in the Official Gazette, portend even greater BRV 
intervention in the economy and a likely move towards 
Prebisch style Import Substitution Industrialization 
policies.  END SUMMARY. 
 
¶2. (U) On December 5, the Ministry of Light Industries and 
Commerce (MILCO) announced a new 15 percent tariff surcharge 
on luxury goods and those considered "non-priority items." 
Included among the 200-plus items are: alcohol (including 
Venezuelans beloved whiskey), rugs and carpeting, furniture, 
jewelry, and toilet paper.  This new tax raises the tariff on 
most of these goods to 35 percent, which along with the 14 
percent value added tax brings the government's take on these 
sales to over one third of their price.  (Comment: One astute 
observer characterized this measure as "selective 
devaluation."  End Comment.) 
 
¶3. (U) The Commission for the Administration of Foreign 
Exchange (CADIVI) approves most foreign exchange transactions 
in Venezuela.  For an ever-increasing list of goods, however, 
the requester must first get approval from the Ministry of 
Agriculture or MILCO to show that the good they are seeking 
to import is not produced in Venezuela, or that there is 
insufficient domestic production to meet demand.  In addition 
to being another bureaucratic hurdle for private industry, 
this requirement allows the BRV to try to promote domestic 
production by restricting imports.  The revised list now 
includes 3,500 items which do not require separate ministry 
approval to obtain dollars while a remaining 5,500 items 
still require this certificate of approval.  The pre-approved 
list is increasingly geared towards primary inputs (minerals, 
chemicals, etc.) and capital goods (machinery) destined for 
Venezuelan industry. 
 
¶4. (U) In addition to increasing import taxes on "luxury" 
goods and speeding the approval process to obtain dollars to 
import goods for industry, the BRV also imposed price 
controls on 47 items used in construction, including: sand, 
stones, brick, steel rods, wire, wood, metal doors and 
frames.  The construction sector is booming in Venezuela due 
to the oil-fueled economic boom and government policies. 
Banks are required to lend a minimum of 10 percent of their 
portfolios to construction, and the government has been 
funding new schools, homes and infrastructure projects around 
the country.  Building material prices have gone up 
significantly this year and there are shortages of concrete 
and other materials throughout the country due to high demand 
and a disinclination by companies to invest to increase 
production.  Fixing prices will only exacerbate the shortages 
by pricing the goods below their market rates and creating a 
black market where goods are sold at higher rates or with 
kickbacks.  (Note: interestingly, and in an odd twist, Post 
heard that the BRV set the prices for some materials using 
the rate contractors charged municipalities which is way 
above the market rate.  We cannot confirm this yet.  End 
Note.) 
 
¶5. (SBU) These changes portend an even heavier government 
hand in the market and a state paternalism reminiscent of the 
thoroughly discredited Prebisch style Import Substitution 
Industrialization (ISI) policies of the 1960s.  By taxing 
imports and consumption of luxury and finished items while 
encouraging the importation of primary inputs and capital 
goods (via CADIVI approvals, directed lending and government 
support), the BRV seeks to create an industrial base neither 
 
CARACAS 00003653  002 OF 002 
 
 
efficient nor necessarily appropriate for the Venezuelan 
economy. 
 
¶6. (SBU) An over-valued exchange rate is also a tenet of ISI 
that makes capital goods cheaper, though in practice has hurt 
Venezuelan companies which cannot compete with artificially 
cheap imports.  The increasing number of government policies 
to promote industrialization are occurring as thousands of 
industrial establishments close their doors.  This irony 
appears to be lost on Chavez and BRV officials, who routinely 
decry Venezuela's lack of an industrial base while 
enthusiastically legislating the country's 
deindustrialization.  If any lesson is to be drawn from 
policies of the last eight years it is that the industries 
most likely to have a leg up are those dependent on Chavez, 
by way of state ownership or subsidies, and those whose 
"politically correct" behavior keep them presidentially 
potable. 
 
¶7. (SBU) COMMENT: These measures, taken only two days after 
the elections, offer a preview of 2007.  While the government 
may expect its policies to incentivize domestic production, a 
host of other contradictions (including the over-valued 
exchange rate, rigid labor laws, currency controls, a lack of 
contract enforcement, a weak intellectual property rights 
regime, price controls, and a lack of predictable BRV 
attitude towards the private sector) make it more likely that 
inflation will accelerate as people pay more for their 
ever-dearer imported goods.  Price controls -- already 
creating distortions throughout the economy -- are likely to 
make recurring shortages even worse.  END COMMENT. 
 
 
BROWNFIELD