The Economic Crisis in Venezuela: How Hugo Chavez Squandered An Oil Boom.

by Kimberly Ruff

On December 2, 2007, Venezuelan voters turned down a series of amendments to the Bolívarian Constitution of 1999 (Rodríguez, 2008a). The 32 proposed changes included putting the autonomous Central Reserve Bank under presidential control, removing the two-term limit for president, and giving the government greater control over the country’s petroleum and gas deposits (Fraser, 2008). This was the first electoral defeat for Venezuela’s bombastic president, Hugo Chávez, since sweeping into office in 1998 (Fraser, 2008). Supporters and critics alike were stunned (Rodríguez, 2008a). How could the man – whose campaign slogan was “Con Chávez manda el pueblo1” (Cameron, 2001) and who consistently publicly announces all the good work he is doing for Venezuela’s sizable poor population (Rodríguez, 2008a) – have his beloved people turn against him at the ballot box? The answer lies in the gross mismanagement of Venezuela’s economy during its first oil boom since 1970 and the strengthening of executive control under Chávez. 

The popular wisdom on Chávez is that he is the champion of Venezuela’s poor. It was on this platform that Chávez took office in 1998, breaking the stronghold of the two major political parties, Acción Democrática (AD) and the Christian Democrats (COPEI). (Cameron, 2001). Shortly after taking the oath, Chávez called a Constituent Assembly and rewrote the Constitution of 1961 (Cameron, 2001), infusing it with Marxist ideology for 21st Century Socialism (Lebowitz, 2008). Chávez, a Populist, has openly rejected Capitalism, arguing that it must be transcended in order to end the poverty of the world (Lebowitz, 2008). His solution is a “humanist” socialism “which puts humans and not machines or the state ahead of everything” (Lebowitz, 2008, p. 1). His plan includes, among other things, “subsidiz[ing] food to low-income families, redistribut[ing] land and wealth, and pour[ing] money from Venezuela’s booming oil industry into health and education” (Rodríguez, 2008a, p. 49). It would appear that these reforms are working; according to 2007 Social Panorama of Latin America, between 2002 and 2006, poverty decreased by 18.4 percent and extreme poverty by 12.3 percent (Alvarez Herrera, 2008). Yet, remarkably little empirical evidence exists to suggest that Chávez – or his reforms – were responsible for these changes (Rodríguez, 2008a). According to Rodríguez (2008b), when looking at actual indicators of spending directed at poor, such as education, health and housing, “the share of spending devoted to these categories has been essentially unchanged during the Chávez administration” (p. 160).

In fact, it’s only gotten worse. After the political and economic crisis of 2002-3, in which a two-month long national strike resulted in a failed coup attempt and the takeover of the state owned oil company PVDSA by Chávez loyalists, the pace of change has accelerated, taking on three basic dimensions (Rodríguez, 2008a). First, state control has increased. Government expenditures have risen to 29.4 percent of the GDP, inflating GDP and giving the false perception of an increase in national output. Key sectors have been nationalized, such as electricity, telecommunications (Rodríguez, 2008a), cement (Civil Engineering, 2008), and steel (New York Times, 2008), eliminating healthy competition, thereby allowing an incline in cost and a decline in quality. Furthermore, fear of future nationalizing of industries discourages foreign investors. According to Rodríguez (2008a), since Chávez loyalists took control of PVDSA, Venezuelans witnessed a dramatic decline in oil-production capacity, with OPEC statistics showing the country only produces three-quarters of its 3.3 million barrels a day (p. 60). Second, price and wages have been set through a “web of restrictions in place since 2002” (Rodríguez, 2008a, p. 51). Price and wage ceilings and floors force the Invisible Hand and disrupt the economic equilibrium achieved by supply and demand; ceilings discourage supply as producers see no incentive to produce, and floors discourage demand as consumers typically opt-out of consumption if they can. Third, security of private property has deteriorated as private firms and landholdings have been expropriated by the government (Rodríguez, 2008a). The destabilization of private property discourages entrepreneurship, as the loss of property is deemed too risky for potential businessmen. All these factors are connected in a vicious, self-reinforcing loop: a steep decline in the quantity and quality of production resulting in a sharp increase in prices, causing the government to pump more money into the economy, nationalize industry, and enact price controls, all of which, in turn, discourage production and lead to its decline in quantity and quality. Currently, Venezuela is in the midst of another economic crisis in which inflation rates reached as high as 3% in December 2007 (Economist, 2008a). Rather than curb the expansion of government spending, Chávez has rejected this as “neoliberal dogma” (Rodríguez, 2008a, p. 57).
In effect, Chávez’ populist reforms have created an economic monster.

Further compounding this problem is the consolidation of power in the executive branch under Chávez. A former military officer, Chávez first gained public recognition when he led an abortive coup against then-President, Carlos Andrés Pérez in 1992 (Cameron, 2001). Despite finally assuming power through democratic elections, Chávez continually returns to his military roots by using the military for public works projects, referencing his former affiliation in his speeches, and wearing military attire (Cameron, 2001). Backed by military hard-liners and former members of his failed coup attempt that were reintroduced into the military after he took power, Chávez has fashioned an image of himself similar to that of his Cuban ally, Dictator Fidel Castro (Cameron, 2001). This attitude is more than skin-deep. Beginning with his rewriting of Venezuela’s Constitution in 1999, Chávez has created a legacy of stifling dissent. His Bolívarian Constitution does more than simply outline his economic plan for the country: members of rival political parties, COPEI and AD, are forbidden from holding any office; the judicial and legislative branches have been reduced to mere skeletons of what they once were; the presidential term lengths were increased to six years; and the Executive Branch, which originally had the ability to make decrees on economic matters only, has been given the right to do so on any topic (Cameron, 2001). His December 2007 referendum would have only added to this.

Yet, as history has shown us, great power not only comes with great responsibility – it comes with great paranoia. In early June of 2008, Chávez issued a decree that created a “new intelligence and counter-intelligence system which in the name of national security enlists the entire population in what could potentially amount to a spy network” (Economist, 2008b). Reversed a week later after considerable public outcry (Economist, 2008d), this decree would have authorized warrantless police raids and the use of anonymous witnesses and secret evidence, requiring all citizens to act in support whenever required or risk jail time of up to six years (Economist, 2008b). Under Chávez, the country has become has been polarized between “friends” and “enemies” to such a degree that even respectful disagreement comes with heavily publicized denouncements from Chávez (Cameron, 2001). In order to insulate himself from criticism, he has surrounded himself with sycophants who refuse to tell him he’s wrong even when his economic decisions are clearly destroying Venezuela.

Given the recent history of Venezuela, it stands to reason that, despite having elections, there’s relatively little in the way of democracy to suggest it still is one. Although much debate exists as to what factors are necessary for democracy (Dahl, 2003), the general consensus is that free and fair elections are one of the requirements (Diamond, 2008). While Chávez may give his constituents choices when it comes time to go to the polls, the Bolívarian Constitution has prevented members of COPEI and AD as well as anyone “identified” as having a reputation for lack of integrity from running (Cameron, 2001). Additionally, the nationalization of the telecommunications industry further prevents political competition from publicity (Rodríguez, 2008a). Although his second six-year term limit comes to an end in 2011, it’s difficult to imagine Chávez going quietly into the night (Economides, 2008).

The story of Hugo Chávez demands change. No longer is he the champion of Venezuela’s poor who, through a series of sweeping reforms, took the oil profits of the fourth largest producer in the world and turned it into a socialist utopia. Rather, he is a deeply insecure, erratic man who preached economic equality and yet served to only widen the gap between the wealthy and the poor. This is a something Venezuelans are starting to realize. Hence, his stunning referendum defeat at the polls on December 2, 2007.
 

Appendix

1. Translation: With Chávez, the people rule.

References

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