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Brazil Rises as Venezuela Declines

The diverging prospects of two South American oil powers.

by
Jaime Daremblum

Bio

October 27, 2011 - 12:00 am
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While Caracas hopes that major foreign energy firms will invest in its Orinoco Belt oil projects, those firms are justifiably worried about Venezuela’s lousy infrastructure, its nonexistent rule of law, its political instability, and the windfall-profits tax that Chávez decreed six months ago. “There aren’t positives signs regarding the conditions for investing,” one oil executive recently told Reuters. No kidding. The World Economic Forum’s 2011–12 Global Competitiveness Index ranks Venezuela dead last out of 142 countries for the quality of its institutions, dead last for the “business impact of rules on FDI,” dead last for overall goods-market efficiency, and dead last for overall labor-market efficiency. The country also places a dismal 128th for the quality of its transport infrastructure. The World Bank’s 2011 Ease of Doing Business Index ranks Venezuela several spots behind war-torn Iraq and Afghanistan.

To be sure, the Brazilian business climate is hardly ideal: It is plagued by high taxes, cumbersome regulations, rampant corruption, and poor infrastructure. Yet despite these weaknesses, Brazil has been implementing pragmatic economic policies for the best part of two decades, and today it is a far more attractive investment destination than Venezuela.

The existence of huge oil reserves under a country’s soil or territorial waters is obviously a matter of luck — or, as former Brazilian president Lula da Silva once put it, “a gift from God.” But how a nation utilizes its energy resources depends on political leadership. And whereas the Venezuelan state-run oil giant PDVSA has been ravaged by incompetent management, the partially state-owned Brazilian firm Petrobras has enjoyed stunning success.

In a 2008 article for The American, energy expert Robert Bryce explained that “Petrobras has become an elite global energy player by doing what most other national oil companies refuse to do, including selling shares of the company to the public.” (Its public offering in September 2010 generated $70 billion, making it the biggest share issue of all time.) “And while many other big oil exporters, particularly within OPEC, either refuse to disclose their production data or publish fictitious numbers, Petrobras issues frequent press releases that discuss the latest developments within the company, including production trends, financial conditions, and new discoveries.”

Speaking of new discoveries, Brazil’s recent oil finds rank among the largest in modern history, and they have made foreign investors salivate (while also sparking domestic political fights). “Within the next 10 years,” writes journalist Kenneth Rapoza, “the oil and gas industry around the world will invest an estimated $3 trillion exploring and drilling for oil. Of that, around a third will be invested in Brazil.” According to Romero, its daily oil output could more than double by 2020 to reach over 5 million barrels. Such growth would effectively be like “adding another Kuwait to world oil production.” Already one of the world’s top ethanol producers, Brazil could eventually become the fourth-biggest oil producer (behind only the United States, Saudi Arabia, and Russia).

The fundamental lesson of Brazil’s rise and Venezuela’s decline is not terribly complicated: Democratic capitalism leads to economic progress, while Bolivarian socialism leads to economic ruin. Happily, as the Economist observed this past July, the pro-market Brazilian model “is now the fashionable formula in the region,” and “the tide of Latin American history has turned against Mr. Chávez.” Unfortunately for Venezuelans, they will be living with the consequences of Chavismo for many years.

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Jaime Daremblum, who served as Costa Rica’s ambassador to the United States from 1998 to 2004, is director of the Center for Latin American Studies at the Hudson Institute.
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