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Economy

Venezuela’s Paradox

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Executive Summary

  • The demonstrations in Venezuela have not been the center of world attention, but are nevertheless important both regionally and globally;
  • Police brutality and political blundering have turned the initial, small student protests over crime into a much larger, popular expression of discontent with daily violence, corruption, and shortages. The primary beneficiary of this has been Leopoldo López, who has taken over the opposition from Henrique Cardiles;
  • Nicolás Maduro is President of Venezuela, but he lacks the charisma and powerbase of his predecessor Hugo Chavez. This makes his ability to rein in the PSUV, end government corruption and abuse, and push through needed economic reforms very doubtful;
  • The popular image of Venezuela as a failed Soviet-style economy is not true, at least not yet. Venezuelan economic performance has been in-line with the long-term historic trend, despite investor mistrust and capital flight by Venezuela’s elites. The government has also mismanaged the economy;
  • Venezuela leads Latin America in alleviating extreme poverty and reducing income inequality;
  • This contrast generally holds true between Latin America’s two trading blocs: the conservative Pacific Alliance generates faster economic growth, while the social democratic Mercosur produces more equitable social outcomes. Both are valid models for the region;
  • Traditional elites across the region have lost power and the old exclusionary political models are no longer valid. Across Latin America, the people are demanding greater transparency and democracy from the leaders, regardless of ideology.

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Most of the world’s attention over the past month has been focused on the dramatic events in Crimea. This is understandable, as there are few flashpoints where two[1] nuclear armed powers could potentially find themselves in a shooting war, and Ukraine is one of them. Russia’s actions also through into doubt Europe’s security arrangements and the future of that continent, still one of the wealthiest of the world and a major trading bloc.

The ongoing demonstrations and protests in Venezuela are also worthy of notice, but have been almost ignored in mainstream – i.e. US and European – media. What began in January as student protests against rampant crime in the capital of Caracas has spread across the country to people sick of government corruption and endemic shortages of basic goods. The initial protesters, who can be described as young, idealistic, middle-class students, have been met with tear gas, rubber bullets, police beatings, detentions, torture and all the hall-marks of a stupid and inefficient autocratic regime. This won them a degree of sympathy from the larger population that is beyond their actual demographic appeal. The adherence of Latin American “celebrities” to the protest cause, like world famous author Mario Vargas Llosa, has also increased the legitimacy of the demonstrations. The brutal, heavy-handed repression of Nicolás Maduro’s government has only inflamed the situation.

The politician who has most benefited from the unrest and violence is not Henrique Capriles, the popular former governor of Miranda, congressmen, and leading opposition candidate in the 2012 and 2013 elections. Instead, it is Leopoldo López, a former mayor of Chacao and leader of the Voluntad Popular party. Mr. López was involved in the failed 2002 coup attempt against Mr. Chavez, though he successfully distanced himself from the actual perpetrators. He took a backseat to Mr. Capriles in the last two elections, but since he conceded defeat and shook Mr. Maduro’s hand, he has broken with the ex-Governor to pursue a more confrontational approach. Mr. López has supported the protesters, and his arrest has only added to his popularity.

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Maduro’s government rests on shaky ground. He is the inheritor of the deceased strongman Hugo Chavez’s political machine, but lacks his boss’s charisma and powerbase. Mr. Chavez was, in a sense, lucky to die when he did: the Venezuelan economy was already showing signs of extreme stress due to a lack of investment, shortfalls in oil production, and the rapaciousness of government and party leaders. The bills are now coming due during the Maduro Administration. Mr. Chavez would have had the power to clean up the excesses within his party – though it is not clear that he would have had the foresight to do so – but his successor lacks this authority and has been unable to rein in the worst abuses.

Mr. Maduro has not succeeded in reversing the investment shortfall in his economy either. There are two reasons for this. First, the frankly Cuban-style socialist model scares foreign investors away. Mr. Chavez has not hesitated to nationalize foreign establishments, especially American companies, when he felt it necessary. The Maduro Administration is, if anything, even more in love with the Cuban approach, despite many within his own party urging him to turn away from Havana and look more towards the Brazilian “O Socialismo Bonito” model. The second motive, and one not to be dismissed, is the very active connivance of Venezuelan elites in discouraging their class friends in other countries to not invest back home. So odious to them was Mr. Chavez, and now Mr. Maduro, that they are perfectly willing to sabotage their own nation to ensure the victory of the Venezuelan oligarchy against the “bus drivers”[2] and poor of the nation. In other words, they are engaging in open class warfare.

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Despite the very real problems the country and people are suffering from, numerous polls and surveys show a broad level of support for the Administration, though there are contradictions in the results. An April 6 poll by Datanálisis gives President Maduro an approval rating between 43% and 45%, which compares favorably with President Obama; none of the opposition leaders have above 40% approval. A March straw poll by International Consulting Services gives Maduro 56% of votes with the opposition taking 34%. On the other hand, a March Gallup poll gave the President only 34% approval. Polls by the Venezuelan Data Analysis Institute and Hercon Consultants also found a 33% to 34% approval rating for Maduro. The only thing that is clear from these differences is that there a clear division in Venezuelan society; and that Maduro’s support is deteriorating even within his base of support. He is mishandling the economy and bungling the response to the protests.

Yet there is a good reason for the division in Venezuela and the hard core of support for Maduro and the Bolivarian revolution. It has brought real and substantial benefits to the poorest segments of Venezuelan society. The revolution instituted by Mr. Chavez overthrew the control of Venezuelan politics by wealthy elites; is it any wonder that they loath him and his successor?

The Venezuelan oligarchy charges the Bolivarian revolution with ruining the country’s economy and democracy. Yet it was these same people who attempted to overthrow him in an undemocratic military coup and were only unsuccessful due to their lack of resolve in the face of massive protests. There are certainly valid reasons to question the democratic credentials of the Bolivarian Party, but Mr. Chavez won his electoral victories without too much trouble or the need for widespread fraud. The 2013 election was far closer as Mr. Maduro lacks the popular support and credentials of his predecessor, but despite charges of widespread fraud by Mr. Capriles, the Carter Institute tentatively endorsed the election results, as did a partial recount of the votes.

The charges of corruption are largely true, though it is difficult to say that the Bolivarian elites are more extractive, predatory or venal than their crony capitalist predecessors. Yet despite the evident mismanagement of economic priorities and the deliberate sabotage of foreign direct investment, the economy has not performed badly. The average annual growth in real GDP has not varied significantly from the long-term trend since 1950:

ven_rgdp

ven_rgdp_long

Indeed, the second half of Mr. Chavez’s rule saw an economic performance that improved significantly over the 60 year trend.

What’s more, the Bolivarian revolution has largely delivered on what it had promised in 1999: a reduction in poverty and a fairer distribution of wealth for the masses of people. In these two measures, Venezuela ranks at the top of the table for Latin America:

poverty

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This is important not only for Venezuela, but in light of the continuing debate on the “best model” for Latin American economic and social development. On the one hand, you have the Pacific Alliance of Mexico, Colombia, Chile and Peru: all relatively conservative, “pro-US”, free market economies[3]. On the other hand, the Mercosur are of Brazil, Argentina, Uruguay, Paraguay and Venezuela: left-leaning, “anti-US” social democracies (more or less). Ecuador, Bolivia, Nicaragua and of course Cuba are also in this ideological category, though they are not members of Mercosur. Guatemala, Honduras, El Salvador, Costa Rica, Panama and Dominican Republic are more closely aligned with the Pacific Alliance nations.

blocs

What is clear is that the “free market” economies of the Pacific Alliance and Washington Consensus are outperforming their “social democracies” neighbors by about 0.5% to 1.0% GDP growth per year. That is not inconsiderable and would be impressive if it could be sustained for a few more decades. On the other hand, Mercosur and the “social democracies” have reduced wealth inequality by on average 6% to 9% more than the more laissez faire states. Which of these measures is more important is a question of time and circumstances that each sovereign people must decide for themselves, but certain conclusions stand out:

  1. Both models have contributed to economic growth AND social equality. With the exception of Costa Rica, NONE of the Latin American states has experienced an increase in income inequality, or failed to grow GDP, despite the 2000 Dot-Com Bubble and the 2008 Great Recession[4]. Latin American societies no longer have to choose between greater growth or greater equality – both models are proving viable, and the countries can and should move along the scale as circumstances warrant;
  2. Venezuela is not an outlier, nor is it a Soviet economy in the Caribbean – at least not yet. Hugo Chavez was able to dominate both the “Bolivarian Revolution” and the United Socialist Party because of his immense prestige with the masses and his complete control over the party apparatus he set up. Nicolás Maduro lacks both of those advantages. If “Chavismo” was a cult of personality akin to that of Stalin, then Maduro is not even a Nikita Khrushchev, he is a Leonid Brezhnev. And what Venezuela desperately needs is a Gorbachev of Deng. Foreign investment must flow back into the country, which means reaching an accommodation with the opposition and the United States; and the rampant corruption of the entrenched USP apparatchiks must also be reined in. It is doubtful whether this can be accomplished;
  3. The era of the traditional caudillo elite is well and truly over, even in the conservative states. No more PRI[5], no more stultified Christian Democratic elites[6], no more swapping power back-and-forth between blancos and colorado[7]s to prevent a leftist victory. Those elites still exist, and their political parties still exist, and they will undoubtedly return to power at some point. But they know that the days of unaccountable rule and parasitical cronyism on a scale so legendary as to define the continent for over 100 years. From now on, they will have to adapt themselves to a far more equitable, more transparent, more democratic system or else go back into the political shadows for another decade or two. This is an altogether positive achievement.

Just to be clear, I am not defending Mr. Chavez or Mr. Maduro. I believe both to be anti-democratic and unscrupulous men; and in the case of Mr. Maduro, something worse: a bungler. I am indifferent to the fact that he was once a bus driver; but he has yet to demonstrate any great political or economic acumen and the situation is slipping out of his hands. I sincerely hope the violence in Venezuela subsides, and that the killing and torture of my Latin brothers and sisters end soon. At this point, it appears to me that Mr. Maduro has gone so far that his destitution is justified and required, if it can be achieved peacefully.

Beyond that, I would wish that Venezuela embrace democracy and a socially equitable growth model. Returning to the old ways of crony capitalism, oligarchy and political exclusion prior to the “Bolivarian revolution” should no longer be an option. Whether Caracas looks for inspiration to Brasilia or Bogotá, Montevideo or Santiago, is up to the Venezuelans to decide. God grant they choose wisely and in peace.


Sources and Notes

[1] At least two. Besides the United States and Russia, the British and French are independent nuclear powers and could have been dragged into any fighting as a result of their NATO commitments.
[2] Mr. Maduro was at one point a bus driver in Caracas before becoming a union boss and climbing the political ladder. It a favorite slur used against him by his political enemies.
[3] Peru is a bit of an outlier, especially since the election of the populist Ollanta Humala.
4] This assertion nonetheless needs to be taken with some caution, in particular with regards to Argentina.
[5] Partido Revolucionario Institucional, the Mexican political party that held power for 71 years by less than democratic means.
[6] Emphasis on “stultified” and “elites”, not “Christian Democratic”.
[7] In both Argentina and Uruguay, the blancos (whites) and colorados (reds) represent traditional political alignments from the post-colonial period.

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