State-run companies in Venezuela are unproductive and inefficient, according to new study

There is now more proof positive that government expropriations in Venezuela are hurting that country’s economy and its workers. A comprehensive analysis of 16 nationalized companies reveals that the socialist production model faces “serious difficulties in its sustainability” and requires a large amount of State funding.

“Our findings are not very encouraging or positive…Government ownership of companies is often accompanied by deficit problems and lack of incentives to be effective and efficient,” said Economist Richard K. Obuchi, who served as Project Coordinator.

The study, Management in the Red: An Evaluation of the Performance of 16 State Companies and General Results of the Socialist Production Model, was conducted by Mr. Obuchi and two other experts from the Institute for Higher Studies in Management (IESA) in Caracas. To reach their conclusions, the authors looked at the evolution of domestic and foreign companies – including U.S.-food giant Cargill – that have been expropriated by the Chávez government. They found significant operational problems and, in some cases, even a complete halt in operations in the State-run companies.

“Production levels are below or way below forecasts. In some cases, the companies don’t even become operational, yet they remain an expense for the State in terms of payroll or maintenance costs,” said co-author Bárbara S. Lira.

In one case study, that of paper producer Invepal, the analysis shows a decline in production from 15% to 12% in one year, resulting in the production of more than five million books instead of the 30 million that were forecasted. For Invepal workers, expropriation meant seeing their 49% share in the company reduced to 17.3%, while the State holds an 82.7% interest.

Another case study shows how the Venezuelan operation of Rialca, a U.S.-based aluminum company, has been paralyzed since December 2009 – that is 18 months after it was expropriated by the government.

The sale of goods at prices below cost, which inevitably results in a government subsidy, is one of the main causes for problems in State-controlled companies, according to the study’s authors. They also point to the fact that investments are made in activities outside the realm of production, including some that are political in nature.

In conclusion, the authors make the following recommendations:

–Preserve and encourage private property and free enterprise

–Allow the system of market prices to function as a mechanism for the allocation of resources

–Reform the price controls system with the goal of ending shortages

–Limit the financing of public enterprises with funds from the national treasury

The question is…will Mr. Chávez listen? From 2007 to 2010, the Venezuelan State has spent more than $23 billion in expropriations, acquisitions, and the creation of companies that follow the socialist production model.