Jan. 8 (Bloomberg) -- Venezuelan President Hugo Chavez wants his country's central bank to fork over $1 billion for his administration to invest in agricultural projects. If the bank refuses, Chavez says he's ready to assume control of it.

``It isn't right that we have $21 billion in reserves and the central bank refuses to finance the development of the country,'' he said yesterday in a speech to farmers.

He also declared that ``if the central bank has to be taken over, it will be taken over.''

It's all vintage Chavez rhetoric, of course, and a somewhat obvious political ploy.

Chavez faces a recall election sometime this year and polls indicate he may well lose his office. Perhaps he thinks a diversion is needed. Why not promise to confiscate money from the central bank to give money to the impoverished agricultural sector?

To his constituents, presumably the poorest of the poor, this probably sounds somewhat like a good idea. After all, $21 billion in reserves would seem to most people like the central bank has money to spare.

By all rights, Chavez's remarks about the central bank should have caused panic selling of the Venezuelan bolivar. Of course that can't happen because last February Chavez pegged the bolivar at the rate of 1,598 to the dollar.

The peg is effective because Chavez has installed a commission to run a strict set of controls on foreign exchange trading.

In 2003, the commission approved the sale of a total of $10.2 billion. Eighty percent of that was to have been for imports of goods; $1.47 billion was to be used for the service of foreign debt and the rest for foreign companies to repatriate capital and profits.

Actually, only $4.5 billion of the $10.2 billion approved was sold last year, less than half the total dollar sales in 2002.

Economies of Control

Perhaps none of this is surprising given Chavez's history of mismanaging Venezuela, and his proven proclivity for expanding his control over the country.

How can he get away with demanding money from the central bank and threatening a takeover if he doesn't always get what he wants? It's nothing less than the president of a country extorting money from the central bank.

The answer is that Chavez has taken Venezuela so far down the road to totalitarian control that he has some liberties for folly in the short run. Some of the ordinary consequences that any other government would suffer no longer apply to him.

And there's a lesson here in the interplay of economics and politics.

Had Chavez not already frozen the foreign exchange market -- already a bad idea -- he would have had to pay an immediate price for his ill-advised threatening advance on the central bank's autonomy.

A floating bolivar would have taken a steep dive. Since Venezuela has borrowed abroad in dollars, the local value of the national debt would rise.

The bolivar peg and the accompanying exchange controls masked that process.

Since there is little or no real foreign exchange trading going on in Venezuela, the damage from Chavez's central bank gambit is invisible, at least for now, in terms of exchange rates.

Political Economy

Still, what's true of the foreign exchange market isn't true of the bond market. Chavez may control the currency, at least for now, but he can't strong-arm his cost of borrowing. In other words, Chavez has met his match in the bond market.

On Wednesday, the Ministry of Finance of Venezuela released a brief formal statement addressed to ``The Financial Community.''

The ministry claimed Chavez's comments were taken out of context. It said ``the government has no intention to seek control of foreign exchange reserves nor to take control of the Central Bank.''

The independence of the central bank will be respected -- so says the ministry. And for good measure, the ministry says it's committed to a fully and timely debt service.

What a farce.

Last Updated: January 8, 2004 09:36 EST