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UNCLAS SECTION 01 OF 04 CARACAS 001031 
 
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 SOCI VE
SUBJECT: POVERTY AND JOBLESSNESS IN THE BRV 
 
REF: 05 CARACAS 3830 
 
This message is sensitive, but unclassified.  Please treat 
accordingly. 
 
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SUMMARY 
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¶1. (SBU) BRV data indicates that poverty and unemployment are 
lower today than they were in 1999 when Chavez came to power. 
 The oil windfall and attendant massive government 
expenditures and transfers makes this a plausible contention. 
 However, the BRV's National Statistics Institute (INE) seems 
determined to make things look better than they are by 
manipulating methodologies (for example by counting anyone 
participating in a "mission" or employed more than four hours 
a week as fully employed).  According to INE, poverty fell 
from 50 percent of the population in 1999 to 30.4 percent as 
of the end of 2006.  Official statistics combine opaque 
methodology with rosy assumptions to keep the poverty line 
low.  Similarly, according to INE unemployment fell from 15.3 
percent in 1999 to 8.8 percent as of the end of April 2007. 
Yet, every year over 400,000 Venezuelans enter the labor 
market to compete for fewer than 190,000 jobs created.  BRV 
social expenditures, especially via the missions, work to 
lower unemployment by removing people from the active labor 
force and decrease poverty by providing handouts that 
increase household incomes.  While these programs have 
benefited many Venezuelans, their sustainability is highly 
questionable. 
 
---------------- 
DEFINING POVERTY 
---------------- 
 
¶2. (SBU) The National Statistics Institute (INE) breaks the 
population into three groups: households, poor households, 
and poor households in extreme poverty.  Poor households have 
incomes below the cost of the basic basket of goods and 
services set by the BRV (which includes food, educational 
services, health care, etc.), and households in extreme 
poverty have incomes insufficient to purchase the basic food 
basket.  As of April 2007, the basic monthly basket of goods 
and services cost USD 452 at the official exchange rate and 
the basic food basket cost USD 226 at the official exchange 
rate.  While INE has removed the poverty statistics from its 
website, according to comments made by its president, Elias 
Eljuri, on May 15, as of the end of 2006, 30.4 percent of the 
population was poor, including 9.1 percent of the population 
living in extreme poverty.  This announcement, 
unsurprisingly, marks a huge decrease during the second half 
of 2006.  As of the end of June, 2006 INE reported that 
poverty was 37 percent, including those in extreme poverty, 
who made up 15.1 percent of the population. 
 
¶3. (SBU) INE's poverty statistics are widely questioned, 
especially since 2004 when INE changed its methodology 
following criticisms by Chavez that INE did not accurately 
account for non-monetary value of the BRV's social programs 
(reftel).  Since adding a generous calculation of the effect 
of the "missions," which provide free medical care, 
educational programs, subsidized food, and a variety of other 
handouts, the official poverty rate has fallen significantly. 
 INE has never publicly released its current methodology. 
Between 2004 and 2005, INE claims that poverty decreased from 
53.9 percent of households to 43.7 percent, a highly 
questionable decline given the almost nonexistent poverty 
reduction during the five years previous (reftel).  Since 
that time, official poverty numbers have continued to fall, 
such that according to INE figures, poverty now appears to 
have fallen by over twenty percentage points since Chavez 
came to power in 1999. 
 
¶4. (SBU) According to researchers at Andres Bello Catholic 
University (UCAB), INE's poverty numbers appear low as 
compared to other estimates because of their calculation of 
the basic baskets.  According to poverty expert Professor 
Matias Riutort (PROTECT THROUGHOUT), UCAB's poverty numbers 
show the same trends as INE's, only they tend to be around 
8-10 percentage points higher, with poverty falling from 56 
percent of the population in 1999 to 47.8 percent at the end 
of June, 2006.  INE's baskets contain many price-controlled 
 
CARACAS 00001031  002 OF 004 
 
 
goods, which are often unavailable or sold at prices in 
excess of the regulated amount.  The basic food basket, for 
example contains 50 products, of which 27 are under price 
controls.  Given that many goods sell above their regulated 
price, or are unavailable due to shortages and thus must be 
substituted for more expensive unregulated goods, the actual 
cost of purchasing the basket is higher than INE estimates. 
INE's poverty line is therefore lower because some households 
are categorized as able to buy goods that, in the real 
marketplace, they cannot afford. 
 
¶5. (SBU) The polling and market survey firm Datanalisis 
divides Venezuela into five socioeconomic status (SES) 
groups: A, B, C, D, and E, with A being the best off.  These 
groups are defined by income, education, type of housing, and 
geographic residency, with households of classes A and B (3 
percent of the population) earning at least USD 4,000 a 
month, C (16 percent) earning an average of USD 900 a month, 
D (38 percent) averaging USD 415 a month, and E (43 percent) 
averaging USD 238 a month (all at the overvalued official 
exchange rate).  According to Datanlisis, as much as 80 
percent of the population falls in the D and E social 
classes.  Incomes have risen for the D and E social classes 
in recent years, however increases in income have not 
translated into poverty alleviation due to the structural 
causes of poverty (poor education, weak family structures, 
and inadequate housing, for example).  In other words, even 
though a household's income may have increased, by still 
living in a single-parent household with an eighth grade 
education, in a slum with no sanitation, they remain 
decidedly poor. 
 
----- 
CAUSE 
----- 
 
¶6. (SBU) Poverty is a long term problem in Venezuela that 
stems from the series of boom and bust cycles that Venezuela 
has experienced during the past four decades.  Coupled with 
underinvestment, a population that has tended to grow faster 
than the economy, the population's move from the countryside 
to the cities (today Venezuela's population is 90 percent 
urban), rampant inflation that has virtually eliminated 
Venezuelans' abilities to save during the past two decades, 
and a variety of other structural factors, poverty has become 
an accepted norm in Venezuelan society.  The ever-expanding 
"barrio" ghettos surrounding and pouring into Caracas are a 
relatively recent phenomenon.  They are the result of the 
massive movement of people to the cities during the oil-boom 
1970s coupled with the massive unemployment and poverty that 
accompanied the country's busts and long-term decline in the 
1980s and 1990s. 
 
¶7. (SBU) While Venezuela made great strides expanding 
educational opportunities to its populace in the 1970s, 
returns on investment in education faltered in the late 1980s 
and 1990s as spending declined and the inefficiencies of 
secondary and tertiary systems became evident.  Chavez has 
heavily increased government spending on education, which has 
risen by almost 200 percent in dollar terms since 1999 (not 
including expenditures on many of the educational missions). 
Yet today there is actually a shortage of skilled workers in 
Venezuela, from construction workers to IT professionals. 
Venezuelans lack necessary job skills to take advantage of 
job offers and many do not even bother, preferring to sit at 
home or sell informally, satiated by government handouts. 
 
¶8. (SBU) At the same time private companies are discouraged 
from investing in Venezuela due to the uncertain political 
climate.  While most factories are running at near full 
capacity to meet the oil-fueled consumption boom, few are 
increasing production or hiring new workers.  According to 
one of Venezuela's chambers of commerce, at least 6,000 
industrial firms have been shuttered since Chavez came to 
power.  Venezuelan labor regulations are incredibly difficult 
to fulfill, with one supermarket chain owner telling econoff 
that it was literally impossible for him to fully comply with 
all of the laws and regulations as many are contradictory. 
In the most recent "Doing Business" report by the World Bank, 
Venezuela is tied for last place in the hemisphere in both 
the difficulty of hiring an employee and of firing one. 
Venezuela is estimated to have one of the highest costs of 
labor in South America.  In addition, it has been illegal to 
 
CARACAS 00001031  003 OF 004 
 
 
fire anyone making less than USD 857/month for the past two 
years and the firing freeze was recently extended for another 
nine months. 
 
----------------------- 
UNEMPLOYMENT BY NUMBERS 
----------------------- 
 
¶9. (SBU) Approximately 45 percent of Venezuelans work in the 
informal sector, without job security, health care, or the 
other benefits that accrue to salaried employees.  Annually, 
around 400,000 people enter the labor force, for which there 
were 190,000 new jobs in 2006.  INE recently announced that 
the unemployment rate fell to 8.8 percent in April.  This is 
misleadingly low.  At the end of April, there were 18,916,608 
potentially active adults (adults over 15 years of age), of 
which 12,490,165 were in the active labor force.  Venezuela 
currently has a little over 27 million inhabitants. 
 
¶10. (SBU) INE considers anyone working at least four hours a 
week as well as the participants of many of the missions as 
"employed."  Analysts at the local economic consulting firm 
EconAnalitica estimate that over 750,000 unemployed people 
are considered "employed" due to their participation in a BRV 
mission, and an additional 500,000 "employed" Venezuelans are 
working less than 15 hours a week and therefore would not be 
considered employed, for example, by the U.S. Census Bureau. 
 
¶11. (SBU) The largest drop in the unemployment rate, though, 
is due to the increase in the number of inactive workers. 
Participants of the BRV's educational missions, who often go 
to school as little as 4 hours a week, are considered 
students, and thus removed from the labor force.  If one 
includes the increase in inactives above the average for the 
past 10 years as unemployed, it implies an unemployment rate 
in Venezuela in excess of 13 percent at the end of 2006. 
 
¶12. (SBU) The employment situation is also affected by an 
increase in public sector jobs and a decrease in private 
sector jobs, as government spending increases and private 
firms reduce hiring.  16.8 percent of the labor force at the 
beginning of 1997 was in the public sector.  This ratio fell 
to a low of 14 percent in the second semester of 2003, as oil 
prices declined and reforms cut back bloated bureaucracy. 
The percentage has since grown, with the public sector now 
representing 16.9 percent of the labor force (high for recent 
years, though below the historical high of almost 23 percent 
set in 1983).  Coupled with the 45.4 percent of the labor 
force that, according to INE, is employed informally, this 
leaves only 37.7 percent of the population engaged in formal 
private sector work.  As Riutort explains it, only 37.7 
percent of the population is productively supporting the rest 
of the country.  The petroleum industry, which provides 90 
percent of the country's exports and over 50 percent of 
government revenues, employees less than one percent of the 
country's workers. 
 
¶13. (SBU) In addition, the number of people considered 
disabled or unable to work has grown considerably since 1999. 
 During the past seven years, the labor force grew by 21 
percent and the number of disabled people almost doubled to 
over 1 million (or 5.5 percent of the labor force), implying 
the perverse incentive (hardly limited to Venezuela) for 
people to collect disability payments instead of seeking 
gainful employment. 
 
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COMMENT 
------- 
 
¶14. (SBU) While it would appear that the percentage of people 
technically unemployed has fallen, the number of people with 
actual jobs seems to not have grown in tandem with the 
economy, which grew at 10.3 percent in both 2005 and 2006. 
The reductions in poverty and unemployment numbers are both 
indicative of the massive government spending that has 
occurred in recent years thanks to windfall oil revenues, and 
of creative interpretations of those statistics by the BRV. 
The increasing politicization of statistics in Venezuela will 
make it more difficult to get an accurate picture of the 
Venezuelan economy.  INE and the Central Bank are currently 
devising a new methodology to measure inflation that many 
expect will demonstrate lower inflation than the current 
 
CARACAS 00001031  004 OF 004 
 
 
system. 
 
¶15. (SBU) The hallmark of Chavez' Bolivarian Revolution, the 
missions serve dual purposes for combating unemployment and 
poverty.  First, they provide handouts that raise peoples' 
incomes above the poverty line and second, they remove people 
from the labor pool, thus lowering the unemployment number. 
A discussion of the BRV's missions requires an explanation of 
opportunity cost. The money could arguably be spent in such a 
way to help many more people in an even more significant 
manner.  The BRV's literacy programs, for example, cost USD 
583 per student at the official rate and have had very little 
effect on reducing illiteracy.  By paying both teachers and 
students to participate, however, they provide a benefit to 
these individuals in the form of supplemental income. 
According to UNESCO, the average cost of a literacy program 
in Latin America was USD 61 per pupil in 2005 -- about 
one-tenth of BRV spending. 
 
¶16. (SBU) There is little evidence that these programs treat 
the causes of poverty and unemployment rather than the 
symptoms.  By proverbially giving out fish instead of 
teaching those to fish, and at the same time seemingly 
committed to destroying the   boats and nets, the BRV is only 
temporarily alleviating problems that, as has been the case 
during the country's previous oil booms, will come back to 
haunt successor governments when the price of oil falls and 
the BRV cannot sustain its handout programs. 
 
BROWNFIELD