VENEZUELA: CHALLENGES FACING THE NEW ADMINISTRATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00367R000100020001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: March 29, 2010
• Sequence Number: 1
• Publication Date: January 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence 25X1
Ve0nezuela:
Challenges Facing the
New Administration
ALA 84-10002
January 1984
Copy 217
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Directorate of Secret
Intelligence
Venezuela:
Challenges Facing the
New Administration
Division, ALA
Analysis. It was coordinated with the Directorate
of Operations. Comments and queries are welcome
and may be directed to the Chief, South America
Secret
ALA 84-10002
January 1984
Office of African and Latin American
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Secret
Venezuela:
Challenges Facing the
New Administration F
Key Judgments Venezuela's new President Jaime Lusinchi will face serious economic and
Information available political challenges when he takes office on 2 February 1984. Despite a Bol-
as of 6 December 1983 id majority of the presidential votes and majority control of the bicameral
was used in this report.
legislature, we do not believe that he will. succeed in easing his country's fi-
nancial difficulties or reviving the recession-ridden economy during his
first year
Lusinchi is by most accounts without well- 25X6
formulated views on political and economic issues. The US Embassy
believes that the magnitude of his victory represents more a repudiation of
incumbent President Herrera and proof of the organizational capability of
Lusinchi's Democratic Action Party (AD) than a vote of confidence in the
We and the US Embassy believe that his announced preference for a
consensus approach to government will hinder his efforts to establish his
authority over a divided ruling party, an influential labor sector that
believes it will receive favored treatment from his administration, and
unusually uncooperative opposition parties. Indeed, the combination of a
humiliated and divided Social Christian Party (COPEI) and the AD's
impressive victory-the largest since democratic government was restored
in 1958-could undermine the traditional spirit of cooperation and shared
economic and social objectives between the country's two dominant,
centrist parties 25X1
We believe Lusinchi is likely to follow moderately expansionary economic
policies, which are traditionally characteristic of Democratic Action
administrations. This seems to us implicit in his statements both before and
after the elections and would represent a compromise among various and
competing economic advisers. Although reduced export earnings, which
have fallen by over 30 percent from the 1981 peak, and pressures from in-
ternational lenders will force Venezuela to implement some austerity, we
believe Caracas feels relatively self-assured by its growing foreign ex-
change reserves, which have risen to over $11 billion, and its ability to cut
imports by 40 percent since last February. Because of these two factors-
and traditionally ardent nationalism-Caracas is unlikely to risk the
political costs of seeking a formal IMF agreement. Lusinchi may instead
seek an unofficial IMF "endorsement" of a self-imposed austerity program
or some arrangement that would gain the Fund's stamp of approval with
minimal conditionality.
Secret
ALA 84-10002
January 1984
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In the short term this could be a viable political and economic strategy, but
neither it nor other feasible options are likely to be sufficient to move
Venezuela out of recession over the next year. More importantly, Lusin-
chi's probable course will only postpone-and intensify-the structural
adjustments the government would have to make to assure stable economic
growth over the longer run. The government also will pay other costs:
growing inflationary pressures, greater erosion in investor confidence in
Venezuela's economy, and increased unemployment. Minor policy adjust-
ments, especially to protect against any significant losses of labor backing,
are likely.
Venezuela's outlook-tough political sledding for President Lusinchi and
continued economic stagnation-will adversely affect traditionally close
relationships with the United States. Lusinchi rejects any idea of a special
relationship between Caracas and Washington. If he continues his circum-
spect approach to foreign policy-and preoccupation with economic prob-
lems may incline him to do so-the foreign affairs arena will be left more
open for the aggressive former President Carlos Andres Perez to imple-
ment his Third World views. Perez, in any event, is likely to be a growing
power in the admin presidency in 1988.
On the economic side, we believe that continued import and foreign
exchange controls will sharply reduce US exports to Venezuela in 1984.
Although we believe it is highly unlikely, Caracas could decide to carry out
its threats of continued debt repayment moratoriums and even debt
repudiation if it sees no progress in negotiating debt relief with foreign
creditors. This would especially hurt US creditors, who hold 48 percent of
Venezuela's $36 billion external debt. We believe that such an action, if
successful, could set a precedent that other debtor nations might be
inclined to emulate.
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Secret
Key Judgments
The Economy: Lusinchi's Inheritance
Immediate Political Challenges
Divisions in the Democratic Action Party
2
The MAS (Socialist) Party
5
Lusinchi's Economic Policy Alternatives
6
Self-Imposed Limited Austerity
6
The Expected Course
7
Implications for the United States
8
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Secret
Venezuela:
Challenges Facing the
New Administration E
Introduction
Venezuela is paying the price of a decade of squan-
dered petrodollars, economic mismanagement, and
short-sighted political leadership. Like many other
major developing countries, it cannot meet payments
on its foreign debts and has been forced to suspend
some debt repayment obligations, impose exchange
controls, and severely cut imports. The rate of busi-
ness bankruptcies is climbing, and unemployment,
already at 11 percent by official estimates, continues
to rise sharply; only costly price controls and subsidies
are preventing soaring inflation. The government has
been unwilling so far to make the structural changes
the IMF and commercial bankers regard as necessary
to correct the situation.
This paper examines immediate problems that will
face the Lusinchi administration when it takes office
on 2 February. These include the necessity to reach an
accommodation with international lenders in order to
refinance a large share of the country's $36 billion
foreign debt and, at the same time, forge a national
consensus on economic policies that can be supported
by such divergent groups as labor and business. The
paper also examines the personality of the President-
elect, reviews the economic options available to him,
and suggests his most likely choices. We construct a
downside risk scenario to assess the political and
economic ramifications of unsuccessful policies on
Venezuela, and we review implications for the United
The Economy: Lusinchi's Inheritance
The crippled economy that Lusinchi will inherit re-
flects some strong external stresses that have occurred
over the past several years: the decline in international
oil prices, a lagging world economy, high interest
rates on foreign loans, and growing unwillingness by
international bankers to extend credit to Latin Ameri-
ca. In our view, however, the impact of these problems
has been substantially magnified by successive gov-
ernments squandering the 1974-81 oil bonanza on
consumption rather than investment in productive
projects, failure to diversify the economy beyond the
volatile oil sector, and poor management of foreign
debt. 25X1
Venezuela's current financial predicament emerged in
late 1982, as oil revenues dropped abruptly and
triggered a loss of foreign lender confidence.' By early
1983 continuing losses of foreign exchange reserves-
compounded by rampant capital flight that, at one
point, reached $425 million a week-and bankers'
demands for payment of maturing short-term debt
caused Caracas to take measures to bolster its exter-
nal payments position:
? At first the government introduced foreign ex-
change controls to limit the outflow of currency,
devalued the bolivar to improve the payments ac-
count, and froze prices on all goods and services to
prevent increases in the prices of imported food-
stuffs and materials from triggering considerable
domestic unrest.
? As its financial position continued to weaken, the
government suspended principal payments on pub-
lic-sector debt in March to gain some breathing
room while it negotiated with the banks on resched-
uling short-term credits. President Herrera, how-
ever, resisted international lenders' insistence on an
IMF agreement. According to US Embassy sources,
he apparently believed that adoption of an IMF
austerity program-which would include unifying
the exchange rate at a level determined by market
forces, removal of price and import controls, and a
sharp reduction in public expenditures-would
doom the governing Social Christian Party's elec-
tion chances.
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As an alternative to an IMF austerity program,
Caracas used additional stopgap measures such as
limiting the availability of dollars for imports. Vene-
zuela managed to raise its hard currency holdings
from $8.6 billion to over $11 billion in less than 10
months and has cut imports from $13 billion in 1982
to some $8 billion in 1983. Thus, Herrera leaves office
with the large foreign reserve cushion necessary to
allow the next administration some financial breath-
ing room but with external debt refinancing renegoti-
ations deadlocked-in part because of the delays in
making debt servicing payments-and the internal
economy seriously weakened.
Venezuela's most onerous external problem is servic-
ing its $36 billion debt-of which $29 billion is
contracted by the government and $7 billion by the
private sector. Creditor banks have demanded that
$700 million in overdue interest on private debt be
paid by the government as a precondition to refinanc-
ing the $18.4 billion in public-sector debt due by the
end of 1984.
Immediate Political Challenges
The President-elect has publicly stated that he consid-
ers his electoral landslide-nearly 57 percent of the
vote-and his party's control of the Congress a man-
date for attacking these economic problems. In at-
Although official Central Bank figures for 1983 are tempting to craft and implement effective economic
not yet available, projections made by international policies, however, we believe Lusinchi will face serious
creditors, the IMF, and local business sources are, we political hurdles that will prevent him from dealing
believe, reliable indicators of the depth of Venezuela's immediately with economic problems. In particular,
domestic economic problems: the ruling party itself is seriously divided into rival
? GDP probably dropped 3 percent in 1983, a sharp
decline from the dismal growth of only 0.6 percent
in 1982. According to official government data, the
decline in output boosted unemployment to about 11
percent, while some labor sources place the figure at
24 percent.
? According to the US Embassy, cutbacks in trade
credits and shortages of raw materials and capital
equipment have forced many firms to shut down.
Those still in business are facing a profit squeeze
because of price controls and declining sales.
? High interest rates and a slowdown in government
and private investment have crippled the construc-
tion industry. According to the US Embassy, output
continued to decline after a 27-percent drop in 1982.
? Price controls and subsidies kept the inflation rate
at about 5 percent in 1983, but most Venezuelan
experts believe prices would otherwise have risen
about 20 percent. Although oil revenues-which
constitute nearly 45 percent of government reve-
nues-have stabilized, the IMF estimates that Ven-
ezuela will run a public-sector deficit in 1984
equivalent to about 4 percent of GDP.
factions. He also will be under pressure to come to
terms with labor and opposition Social Christian and
radical leftist parties. His talent for conciliation,
which helped gain him the nomination, could be
useful in these areas, but overall he faces a difficult
and entirely unfamiliar situation. According to the
US Embassy, some of his political associates believe
that he may not be up to the tasld
Divisions in the Democratic Action Party.
Lusinchi is a longtime party
functionary with only a limited personal following and
does not command the loyalty or enthusiasm enjoyed
by other party officials. Because he lacks a political
base of his own, he will
encounter major obstacles when he tries to wield his
authority over a party that has been described by one
AD leader as little more than a collection of fiefdoms
headed by independent and ambitious "barons."
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Elected by the largest majority ever accorded a
Venezuelan presidential candidate, the 59-year-old
pediatrician from eastern Anzoategui State is an
enigma to most Venezuelans. A militant of the Demo-
cratic Action Party (AD) since 1941, Lusinchi was
imprisoned, tortured, and forced into exile in 1952
after a military coup. His exile ended in 1958 with
the restoration of democratic rule and his return to
the Venezuelan Congress where he has served as
deputy and senator. He has been actively involved in
party politics, assuming a number of important posts
that required an ability to resolve disputes and build
consensus. He has weathered AD party splits and
quarrels, usually managing to retain the respect and
friendship of most factions. In 1978 he sought the
presidential nomination with the support of outgoing
President Carlos Andres Perez but lost to Luis
Pinerua, a candidate backed by party founder Ro-
mulo Betancourt.
At a time when the party was suffering from major
internal conflicts among the followers of Betancourt,
Perez, and Pinerua, Lusinchi emerged as a consensus
candidate, not strongly identified with any faction.
According to the US Ambassador, Lusinchi achieved
his present political position more through amiability
and capable neutrality than by vision or strength of
character. The Embassy has observed that his knowl-
edge of economic issues is slight and his past com-
ments on foreign affairs frequently lacked under-
standing or clarity.
Most US Embassy officers in Venezuela believe
Lusinchi comes to office with few of the assets
necessary to deal effectively with the country's seri-
ous problems. The personal characteristics that fa-
cilitated his rise in the party hierarchy are less
desirable in a position that traditionally has operated 25X1
best under a strong hand. Though Venezuela is a
democracy, the historical tradition of the "caudillo"
still appeals to most Venezuelans.
Lusinchi's advisers have gone out of their way to
assure US Embassy officers that the incoming Presi-
dent will be his own man and will not accept tutelage
from Perez or anyone else. Nevertheless, we believe
his lack of knowledge on many foreign and domestic
issues and his total lack of executive branch experi-
ence will make him at least initially dependent on the
advice of others. Thus, we expect an unproductive
struggle among his many advisers, a situation that
all but paralyzed the outgoing Herrera administra-
tion in its last two years in office.a
a This assessment is mainly based on information drawn from
consultations with US Embassy officials in Caracas.1
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Carlos Andres Perez-an ex-
President and major power
within the AD
A major power within the AD is former President
(1974-79) Carlos Andres Perez, who is aggressively
seeking the presidency for the next term that begins in
1989. Because of his forceful personality, internation-
al standing, and formidable reputation, Perez exerts
great influence on public opinion and orchestrates his
activities at home and abroad for maximum political
impact. He appeals to the majority of Venezuelans
who want their political leaders to be colorful, active,
and commanding. His support of Lusinchi during the
campaign was instrumental in the magnitude of AD's
Labor Expectations. The AD's Labor Bureau has
been a pillar of the party since its inception in the
1940s, and labor representatives occupy high positions
in party councils. One of their leaders, Manuel
Penalver, is Secretary General of the AD, a post the
US Embassy reports was acquired in a political deal
with Lusinchi in exchange for labor support during his
quest for the presidential nomination. Because of
labor's role in the election, Labor Bureau spokesmen
are predicting that the new government-and espe-
cially Lusinchi-will be totally committed to labor's
social and economic objectives. This program, accord-
ing to the US Embassy, first calls for price controls,
wage indexing, and the introduction of worker partici-
pation in management of both state and private
companies. Some AD labor leaders claim privately,
according to US Embassy sources, that labor, through
the AD, will run the government.
We believe that labor rank and file is almost certain
to press union leadership early in 1984 to seek a wage
increase commensurate with labor's expectations of
an inflationary surge. The US Embassy notes, howev-
er, that Lusinchi's political debts to labor will be
difficult to reconcile with the more restrictive wage-
price policy advocated by some economic advisers to
weaken inflationary pressures
According to the US Embassy, a high-ranking AD
leader claims that Lusinchi intends to be his own man
and not be bound by promises made to labor. In our
view, this would almost certainly put the new presi-
dent on a collision course with a sector whose coopera-
tion, or at least acquiescence, is necessary to give the
new government time to work out its policies
The Political Opposition
The Social Christian Party. The shattering loss of the
Social Christian Party (COPEI) places the Democrat-
ic Action-Social Christian consensus of the past two
decades on most foreign and domestic issues in serious
jeopardy. The election has set the stage for the
resumption of a bitter struggle for control of COPEI
between outgoing President Herrera and the party's
defeated candidate, former President (1969-74) Ra-
fael Caldera. Caldera's efforts during the campaign to
disassociate himself from the unpopular administra-
tion, and in turn Herrera's tepid support for him, have
all but split COPEI into warring factions. According
to the US Embassy, each group is now bent on the
elimination of the other as a significant force within
the movement, and we believe the power struggle will
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Secret
Table I
Presidential Vote, 1978 and 1983
COPEI
2,482,853
46.63
2,292,637
34.57
AD
2,307,917
43.34
3,770,647
56.85
MAS
274,230
5.15
276,263
4.17
Others
259,734
4.88
292,827
4.42
last for some time. For example, the aftermath of a
bruising political campaign and Herrera's penchant
for combativeness and settling old scores may surface
in the new Congress, where-as a former president-
he is accorded a senate seat.
The election of congressional leaders on 23 January,
when the new Congress meets, may provide an early
indicator of the course that COPEI will pursue and
the extent of damage to the spirit of bipartisanship.
Since 1963 AD and COPEI have divided up major
congressional leadership posts, maintaining an unoffi-
cial pact designed to ensure passage of essential
legislation. We expect the election of congressional
officers will, be more contentious than at any time in
recent history. Although COPEI, by itself, may not be
able to block AD programs, its behavior will help set
the tone for opposition to the government and suggest
whether the traditional rules of the game that have
underwritten two decades of democracy will still hold.
The MAS (Socialist) Party. The election outcome was
a bitter disappointment for the Movement Toward
Socialism (MAS), whose hopes finally to establish
itself as a strong leftist alternative to the two tradi-
tional parties had been sustained throughout the
campaign by highly favorable polling results. MAS's
poor showing has rekindled the longstanding internal
debate over whether the party's future lies in uniting
with radical leftist groups or in continuing to moder-
ate its stance. According to the US Embassy, MAS
Table 2
Congress Vote, 1978 and 1983
Party
1978
1983
(Preliminary Tally)
AD
21
88
29
113
COPEI
21
84
16
60
MAS
2
11
2
10
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hardliners are now blaming the movement's leader,
Teodoro Petkoff, for alienating potential leftist voters
by incorporating in his campaign many of the policies 25X1
followed by the two centrist parties. Party leaders
have apparently decided to shelve their antagonisms
in the near term, but ideological and personal differ-
ences are sufficiently deep rooted to endanger the
party's long-term survivability.
A major reason for the continued cohesion of MAS is
a perception by its leaders that party fortunes could
quickly rebound if the Lusinchi government mishan-
dles the economy. The US Embassy notes that party
leaders are ready to take advantage of any mistakes
by Lusinchi as he undertakes the nearly impossible
task of devising an economic program that will win
the support of international lenders without alienating
the general populace. Despite its slightly reduced
presence in Congress, MAS can count on using that 25X1
forum for criticizing administration policies. Party
leaders have stated that they intend to be particularly
outspoken on bread-and-butter issues, and we look for
them to use every opportunity to try to increase their
support in the labor sector, where MAS already has a
foothold in the important petroleum and steel unions.
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Lusinchi's Economic Policy Alternatives
If the economy is to achieve long-term growth, we
believe Lusinchi will need to make some basic policy
adjustments. Lusinchi, by his own admission, does not
have a good understanding of economics and, there-
fore, will be heavily dependent on a small circle of
economic advisers from within AD, some of whom
hold divergent economic philosophies. In seeking a
consensus, we expect Lusinchi to adhere to the blue-
print of government outlined in his "Social Pact"
pronouncements during the campaign. Never fully
developed, the Pact at best represents an attempt to
guarantee that all interests are addressed, developed,
and respected in the policymaking process. At worst,
according to Venezuelan critics, the Pact is a collec-
tion of vague, ill-conceived concepts that are unwork-
able even under the most favorable conditions.F_
Lusinchi's postelection emphasis on consensus, how-
ever, indicates that the Pact may well have some
relevance for indicating his preferred style of rule and
assessing prospects for his administration. Since we
posit that Lusinchi realistically faces three sets of
policy options in confronting the country's economic
crisis, his preference for political consensus can help
gauge which course he is likely to choose.
Self-Imposed Limited Austerity. We believe Lusinchi
will most likely attempt to meet the minimal require-
ments of the international creditors without alienating
the AD political machine, its constituency, or nation-
alist elements. The program, we believe, would in-
clude compromises on exchange rate policy that
would lower the government's subsidy rate but not go
fully to a market rate. Selected retail price increases
would help producers cover rising costs. There would
also have to be some spending cuts by the public
sector to reduce government deficits and slow demand
for goods and services.
This approach, however, would still sacrifice long-
term economic efficiency for political expediency.
Political factors would strongly influence the determi-
nation of exchange and interest rates, prices, and
wage levels. As a result we would expect a continua-
tion of the economic stagnation that has plagued
Venezuela for the last four years.
headway in cutting public-sector demand.
The IMF Alternative. Throughout 1983 Venezuela
resisted accepting an IMF program, despite extensive
discussions. According to press reports, the Fund
continues to recommend that Caracas gradually unify
its present three-tiered exchange system, remove im-
port controls, eliminate consumer price subsidies for
food and petroleum, reduce budgetary expenditures,
and restrain wages. In formal negotiations with the
IMF for a Fund program for Venezuela, the biggest
sticking point probably would be the level of public-
sector deficit spending. The IMF had sought earlier in
1983 to have the red ink cut by half in 1983 to 2
percent of GDP and called for a surplus in 1984; the
Fund now projects, however, that Venezuela's deficit
for 1983 will probably turn out to be some 6 percent
of GDP. Even if the IMF softens its position some-
what, it still will argue that Venezuela must make
The immediate impact of IMF stipulations would be
continued economic contraction at the same time that
AD leaders and Lusinchi are faced with domestic
pressures for greater public intervention in the econo-
my. Thus, many nationalistic Venezuelans at all levels
of society have criticized the IMF alternative as a
harsh and unacceptable intrusion on the country's
sovereignty. We concur with the US Embassy that,
with foreign exchange reserves increasing and an
improved balance-of-payments position, the AD ex-
pects that it will have a good chance of resolving its
financial problems without recourse to IMF programs
and their attendant conditions. We believe, however,
that Caracas will also need to implement some domes-,
tic economic discipline if it expects to receive a
rescheduling package from foreign lenders and
achieve real economic growth in the longer term.
The Nationalist Alternative. Under this option-
which we believe is the least likely choice-Lusinchi
could try to pursue populist policies and fend off
demands by the IMF and international lenders that
he get the fiscal house in order. This option might
entail: repudiation of the foreign debt, or at least
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repayment at a self-determined pace, while using the
foreign exchange reserves that would be freed up to
pay for imports; increased government spending to
stimulate the economy; and continued price and ex-
change rate controls.
We believe that, although there would be some short-
term political gains in ignoring economic adjustment
policies in favor of stimulation, the costs to Venezue-
la's longer term economic progress would be
enormous:
? Debt repudiation or selective repayment would al-
most certainly discourage banks from providing the
new financing that would be needed to maintain
imports once the initial boost to foreign exchange
reserves was spent.
? Inflation, fueled by deficit spending, would quickly
erase gains in employment and living standards by
squeezing real wages and profits, discouraging in-
vestment, and eroding the value of the bolivar.
Although the lower-income groups might see short-
sighted advantages to such nationalist policies, we
believe that the middle and upper classes-which
would have to carry the burden of such a plan-would
influence Lusinchi to follow a more coherent program.
The Expected Course
Lusinchi's signals to date portend an economic policy
that is a troubling mix of austerity and pump priming
that will fail to put the economy on the track to longer
term development. As such, we believe that it reflects
the competing pressures from his economic staff and
AD party leaders. Lusinchi's program not only offers
incentives to the business sector, but is also packed
with promises to labor. According to the US Embassy,
he says he would:
? Control inflation with flexible price controls.
? Simplify the current three-tiered exchange rate as
quickly as possible into two rates, one for necessary
imports-such as raw materials for export goods-
and another at the market rate for all other
transactions.
? Maintain import controls to encourage import sub-
stitution, particularly in agricultural products.
? Depoliticize the oil industry by restoring its finan-
cial autonomy.
? Renegotiate the government's foreign debt without
causing "undesirable effects" for the public or
worsening Venezuela's balance of payments.
? Improve living conditions for the poor by providing
low-cost housing and enhanced employment bene-
fits.
The US Embassy believes that the expansionary
policies implicit in this program-in particular the
absence of serious belt-tightening measures-are in-
consistent with the fiscal cuts that the IMF and even
some of Lusinchi's economic advisers feel are needed.
US Embassy officers believe, for example, that Lusin-
chi's program will lead to more public-sector ineffi-
ciency and increased state intervention in the econo-
my. A prime target of such intervention, we believe,
could be the construction industry, whose reactivation
would have a multiplier effect throughout the econo-
my. Such effort would have substantial political bene-
fits for the AD, since credits and contracts can be
awarded to party supporters, and housing construction
is a continuing political theme by which successive
administrations are evaluated.
According to the US Embassy's economic sources, if
Lusinchi proceeds along the course outlined in his pre-
election statements, there will be no formal agreement
with the IMF in the next six months. Indeed, in the
last weeks of the campaign, Lusinchi and the AD
stiffened their resolve not to accept an IMF program.
A senior economic adviser to the President-elect
emphasizes that Lusinchi will, not accept an externally
imposed austerity package but intends to resolve the
economic problems on his own. He has only agreed to
form a committee to conduct talks with the Fund.
International creditors have already dropped their
insistence on a formal IMF program as a condition for
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rescheduling the $18 billion short-term debt.
move might set a precedent that could cause other
Latin debtors to waver in adherence to their IMF-
mandated adjustment programs.
We share the US Ambassador's opinion that the
reassurances of some AD leaders that proausterity
advisers will eventually win Lusinchi's support reflect
a minority view within a party that traditionally has
employed populist remedies for national problems.
For example, AD party leaders concede that price
increases will be necessary but contend that-as with
the case of gasoline-Lusinchi cannot accept the
they will be unwilling to force an early showdown that
would jeopardize their exposure in Venezuela.F__-]
If conditions are less favorable, our assessment of the
new administration's economic and political problems
would become even more pessimistic:
? In the event of intransigence on the part of foreign
creditors in negotiating a refinancing package, Ca-
racas would more seriously consider the nationalist
alternative course and probably adopt portions of
it-price and exchange rate controls, increased gov-
ernment spending, and possibly unilaterally setting
debt repayment schedules. Ultimately, Venezuela
could be forced to adopt severe belt-tightening
measures to protect its foreign reserves.
? A collapse of OPEC production quotas and prices or
external demand for Venezuelan crude could also
force Caracas to adopt severe adjustment measures.
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The issues in these elections are generally local,
but they still involve intense party competition and
will invariably be viewed as an early referendum on
the new administration.
Based on Lusinchi's pronouncements and political
predelictions, therefore, we expect he will choose a
muddle-through strategy that does not encompass
major changes. The US Embassy concludes that this
choice will result in zero GDP growth for 1984, an
inflation rate that could top 30 percent, and unem-
ployment that could reach 25 percent. It will also
increase the present uncertainty among potential for-
eign and domestic investors and delay the influx of
badly needed capital for those firms already commit-
ted in Venezuela.
An acute economic crisis, especially if mishandled by
civilian politicians, would, we posit, lead to severe
political disruption characterized in its early stages by
a broad attack on the governing party. We can
realistically envision a scenario that would include:
? Strikes and demonstrations promoted by labor lead-
ers to protect their credibility with rank and file and
to prevent radical leftist groups from gaining influ-
ence in the labor movement.
? A serious effort by the radical left to present itself
as a progressive alternative to a discredited system.
? Eventual military intervention in the political tur-
moil, supported by the middle class and entrepre-
neurial sector, who would see such action as neces-
sary to ward off the radical extremists.
Downside Risks
Even the bleak outlook we project for Venezuela's
economy in 1984 anticipates a willingness on the part
of creditors to show flexibility in refinancing Cara-
cas's external debt. We expect this will occur because
of Venezuela's improved balance-of-payments posi-
tion and solid foreign exchange reserve and because
the upturn in economic activity in the OECD coun-
tries should assure Venezuela of $15.7 billion in
petroleum export earnings in 1984. Similarly, we
believe international bankers' moves so far suggest
Implications for the United States
Venezuela's relationship with the United States has
been traditionally close because of commercial, politi-
cal, and economic ties. Caracas is a strong proponent
of democracy in the hemisphere, the second-largest
Latin American market for US goods, and the
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seventh-largest supplier of petroleum to the United
States. In addition, Venezuela's strategic position
bordering the Caribbean Basin and anchoring the
Andean nations gives it a strong voice in regional
affairs.
Within this context, we believe, however, that Vene-
zuela's grim economic outlook and the likelihood of
rough political sledding for President Lusinchi will
impair bilateral relations. Indeed, according to the US
Embassy, Lusinchi rejects the notion of a special US-
Venezuelan relationship. The most significant change,
in our view, will continue to be felt in trade ties. With
a decline in bilateral trade of nearly 25 percent since
the beginning of 1982, US commercial interests are
being especially hard hit by Venezuela's foreign ex-
change squeeze.
We believe that, as President, Lusinchi will try to
maintain recently imposed import controls. Such a
policy would continue to affect adversely many US
export-oriented firms, especially those of products not
deemed critical to Venezuelan development. Accord-
ing to the most recent trade statistics, US exports to
Venezuela have declined some 65 percent from their
peak level of $5.8 billion in 1981. US banks, which
hold almost half of Venezuela's foreign debt, are also
vulnerable if Caracas is unable or unwilling to meet
its obligations and forces lenders to write off the
credit as bad debt. Such a development-although
highly unlikely-would seriously jeopardize the prof-
itability of some US money center banks and could set
a precedent for other debtor nations.
We believe that the new administration's preoccupa-
tion with economic matters will limit the attention
that Lusinchi can devote to foreign policy.2 His pro-
nouncements on foreign policy have been general,
noncontroversial, and similar to the consensus-based
"nationalist" policies of previous administrations. His
relative silence on Central American issues-except
when addressing strictly US audiences-reflects his
caution on questions that are controversial at home.
To the extent that Caracas does undertake initiatives
in the region, the US Ambassador believes that
Venezuelan and US policies are more likely to conflict
because of the personalities and ideologies that will
chart the new government's course. In particular,
Central American policy probably will strongly reflect
the views of former President Carlos Andres Perez
rather than those of more moderate leaders. More-
over, the leftist bloc in the Congress could press
Lusinchi to adjust his foreign policy in order to obtain
leftist support for more pressing economic programs.
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