This month, the government of Venezuela will carry out the state takeover of major companies in the electricity, telecommunications, and petroleum industries. Hugo Chávez has promoted these measures as part of an economic program that fights the "kingdom of darkness": neoliberal reforms he claims impoverished Venezuela. "The polarization between rich and poor was created by neoliberal capitalism, not by Hugo Chávez," he said recently. "It was created by 500 years of exploitation, most of all in the twentieth century and the last decade of the twentieth century in the neoliberal phase of capitalism, the most savage phase." His supporters buy this argument, as does much of the international left.
But this presentation distorts Venezuelan history. In fact, the long economic catastrophe that led to Chávez's election in 1998 was created not by market reforms but rather by policies just like those that define Chávez's Bolivarian project. While neoliberal adjustments in Venezuela were problematic, a Chávez-style development model holds primary responsibility for the country's abysmal poverty and inequality.
Venezuela came into its own as a national economy only in the 1910s, when oil companies began drilling on the shores of Lake Maracaibo. In the seven decades that followed, per-capita income grew 900 percent; by 1980 Venezuelans were, on average, as rich as Spaniards. (Per-capita income in the next-best-performing Latin American country barely tripled over the same period.) In the 1970s alone, the economy grew by more than half, and consumption soared: The late José Ignacio Cabrujas, a Venezuelan writer and perhaps the country's most astute social commentator, remembered the 1970s as a time when "New York was a trivial weekend trip, and the middle class boarded the plane home ... with Baby Ruth candy bars and People magazines."
But, between 1980 and the turn of the century, Venezuela suffered the worst economic performance of any country in the region except war-torn Nicaragua. The poverty rate doubled, surpassing 70 percent. Population growth and immigration from neighboring countries brought millions to unprepared cities; vast swaths of brick-and-tin houses spread over the slopes of the Caracas valley. Underemployment became the norm in many of these communities. "Mato tigre," residents say when asked how they earn a living: "I kill tigers." Meaning they do odd jobs--paint houses, fix cars, work a day at a friend's street-side stand.
This disaster occurred principally because the Venezuelan government failed to diversify the oil-centered economy. The economic policy of Carlos Andrés Pérez, who presided over the oil boom in the 1970s, consisted of massive public investment in heavy industry; cheap credits for agriculture and private industry; and anti-poverty measures like price controls, expanded social services, wage hikes, and the creation of public sector jobs. By 1980, oil alone accounted for more than one-third of GDP and more than half of government revenue (and even this is probably a lowball figure: It also had indirect effects like stimulating consumer demand). When the price of oil collapsed in 1982, the Venezuelan economy collapsed with it.
Chávez's economic policy is similarly focused on large-scale government projects in heavy industry, and, like Pérez, he is imposing price controls, expanding social services, providing cheap credits to various sectors, and creating tens of thousands of government jobs (the payroll at the state oil company, just 40,000 when Chávez took office, is expected to reach 90,000 by the end of the year, and overall public employment has increased 40 percent since 2002). In 2006, the Venezuelan government spent about $50 billion, a 70 percent increase over its 2003 expenditure of $30 billion (the economy also grew, so this meant a jump from 27 percent to 35 percent of GDP). Like Pérez's administration, the Chávez government has failed to save money in an oil-stabilization fund.
The centerpiece of Chávez's development program is the "popular economy"--subsidies and credits for thousands of newly formed cooperatives. But, although this funding may be fairer than the subsidies and credits Pérez gave his business-class cronies, it is probably not more likely to create alternative sources of revenue or reduce national dependence on oil money. The National Census of Cooperatives has not yet been published, but preliminary statistics suggest that the majority of registered cooperatives are already inactive. Furthermore, like Pérez, the government has not attempted to structure loans in a way that encourages self-sufficiency.
Meanwhile, for all Chávez's talk about reviving the long-languishing agricultural sector in Venezuela, agricultural production declined 7 percent in 2006, even as food consumption rose 10 percent. While fertile Venezuela was a food exporter throughout the colonial period and the nineteenth century, an overvalued exchange rate in the 1930s destroyed Venezuelan agriculture, and it has never recovered.
It's true that public control of industry is not inherently harmful; many governments have successfully owned and managed natural resources and utilities. The problem is that, in Venezuela, state capacity is notoriously low, and public efforts in the telecommunications, electricity, and oil sectors share an unsuccessful history. In this context, private investment is key, and private investment has fallen over the past three years, stooping to 3 percent of GDP in 2006. Venezuela currently ranks last in several international assessments of competitiveness, investment risk, and business environment. Foreign direct investment plummeted from $1.5 billion in 2005 to negative levels in 2006.
The last oil boom is instructive in the dangers of Chávez's program. In the years following the 1973 boom, liquidity in Venezuela more than doubled, inflation hit double digits, and imports grew frantically but couldn't keep up with the monstrous rise in demand, producing shortages of basic foodstuffs. These short-term outcomes are already visible in Venezuela today: The money supply has doubled in two years, and it is now more than one-third of GDP; inflation hit 17 percent in 2006; imports have increased nearly 100 percent in two years; and there are recurring shortages of sugar, meat, chicken, and other foods. The boom-management policies of the '70s caused a fiscal crisis that impelled a reluctant Venezuelan state to implement two rounds of neoliberal reforms, in 1989 and 1996; at this rate, Chávez may be forced down the same course.
That, of course, would be a bitter irony for Venezuela: Those neoliberal reforms are often blamed for the economic woes that produced massive riots in 1989, two coup attempts in 1992, and eventually the election of Hugo Chávez in 1998. But, while mismanagement of the reform process worsened the short-term costs of the adjustment, the heart of the problem was the underlying economic model, in which there was no sustainable source of government revenue or societal income other than oil.
The 1989 and 1996 reforms attempted to improve the government's fiscal position through privatization, reduction of subsidies, tax hikes, and liberalization of the exchange rate. These were necessary reforms that in fact did begin to produce economic growth and investment outside the oil sector, but they were unpopular because, along with low oil prices and other negative shocks, they contributed to declines in purchasing power. Unlike reforms in other Latin American nations, where the immediate effect of market reforms was to bring down hyperinflation and thereby increase spending power, producing political victories for reformers, the short-term effect of adjustment in Venezuela was the opposite: Spending power declined as a result of devaluation and rising inflation. If the government had done a better job of communicating with the public, explaining the need for reform and the likely outcome, the reaction might have been different, but Pérez--who became president for a second time in 1989--campaigned on the promise of a return to the Gran Venezuela of the '70s and then launched the reform program without any public warning. Furthermore, strong opposition from within the ruling parties hampered the implementation of the reforms and thereby delayed their outcomes.
To be sure, there are significant differences between Chávez's economic policy and Pérez's: Chávez devotes a larger portion of the federal budget to social spending; tax collection has increased under Chávez, while it suffered in the '70s; and, perhaps most importantly, Chávez has kept the national debt profile under control (total debt is about 30 percent of GDP). The government still has nearly $25 billion in international reserves, though this represents a sharp decline from $36 billion at the close of last year.
But these differences are unlikely to save Venezuela from 1980s-style troubles when the price of oil falls--and perhaps before then. While debt accumulation has not yet reached dangerous levels, it has been increasing since January; analysts predict that the government will finish 2007 with a sizable fiscal deficit. Unless the economy generates value outside the oil sector, it is only a matter of time before the government must borrow or cut expenditures (and it is unlikely to do the latter).
José Ignacio Cabrujas wrote that Venezuelans admire myths because they don't understand their own history. "Venezuela has not yet been founded, and neither has its capital Caracas," he said in 1995. "It is a city without vision, without memory, without distinguishing features; it is an encampment." Cabrujas died before Chávez took office, but his observations hold: The strength of the Bolivarian economic model is a myth, admirable only to those without memory.
By Dorothy J. Kronick