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Venezuela – a Lesson on how not to manage an economy

By Obadiah Mailafia

WE all like the idea of revolution. The first great revolution of history was the Glorious Revolution of 1668 in England, which led to the establishment of Magna Carta.  The second was the 1776 American Revolution of Independence. Historians are agreed that the 1789 French Revolution drew much of its inspiration from the American experience. Every thinker of that epoch eulogised it, save for one lone voice – that of the Anglo-Irish conservative political thinker Edmund Burke — who reasoned that the costs by way of violent bloodletting were never worth the benefits.

With a population of over 31 million and a landmass of 916,445 km2, Venezuela is one of the pioneer founders of OPEC. It has the world’s largest proven reserves of oil, ahead of Saudi Arabia and Russia. It also has vast deposits of natural gas and gold. In the 1930s, it was the richest country in Latin America, ahead of Argentina, Chile and Brazil. Today, it is a country in deep trouble. The economy has been in depression for almost a decade, with a staggering hyperinflation rate of 1,370,000% by year’s end 2018. After years of military dictatorship the country returned to democratic constitutionalism in the eighties. In April 1998, a young former military officer by the name of Hugo Chavez won the democratic elections by a very narrow margin. He came to power with a revolutionary mandate.

Venezuela

The so-called “Bolivarian Revolution” in Venezuela recently marked its 20 years. Its leader was the late Hugo Rafael Chávez Frías, a charismatic and radical former military officer and coup plotter turned politician. Hugo Chavez narrowly won the 1998 elections against his principal challenger, the soft-spoken, Yale-educated economist and intellectual, Salas Römer.  Chavez came to power imbued with a confused amalgam of revolutionary ideas: from his nineteenth century anti-colonial revolutionary compatriot Simon Bolivar to Karl Marx, Chairman Mao, Fidel Castro and Latin American theology of liberation.

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While taking the official oath of office on  February 2, 1999, he declared: “I swear before God and my people that upon this moribund constitution I will drive forth the necessary democratic transformations so that the new republic will have a Magna Carta befitting these new times.”

From day one, the right-wing opposition, backed by the land-owning wealth caudillos and international capital, were determined to see his back. Mass strikes and demonstrations were the order of the day. He was even kidnapped and flown by helicopter to be dropped alive in the Atlantic Ocean. Unknown to his captors, he had set his army to surround thousands of the opposition, just in case. They gave an ultimatum, “bring him back or you are all dead”.  They had to bring him back.

Hugo Chavez was a charismatic orator and the masses were easily swayed by his prophecies of a “new dawn” for the downtrodden. His socialist economic programme entailed nationalisation of key economic sectors; a social welfare programme of distributing food and other social services to the poorest segments of the population; land reforms; creation of workers’ cooperatives; massive literacy campaigns; free healthcare services; and educational reforms. Encouraged by his success and by high oil prices, he went into deficit spending, over-borrowing from international capital markets and uncontrolled spending.  He also imposed price controls. So-called “Bolivarian missions” were created to deliver public services to the poor, particularly food, healthcare and education. Thousands of highly qualified staff of the country’s national petroleum company (PVDSU) were dismissed and replaced with political commissars and party loyalists. He changed the constitution to remove the term limits on the presidency.  And in terms of foreign policy, he became patently anti-American and anti-Western in his rhetoric. He drew closer to Russia and China while aligning his country more closely with radical governments such as those of Cuba and Nicaragua.

For a time, the revolution seemed to work. The UN Economic Commission for Latin America, ECLAC, noted that poverty rates fell from 49.4% to 23.9 percent within five years. Literacy showed a marked improvement while health registered some positive outcomes. Unfortunately, much of the social spending was at the expense of long-term capital investments. Economic growth declined from a peak of 18% in 2009 to a low of 0.5% in 2013 and -18% in 2018. Scarcities became the order of the day. The United States imposed heavy sanctions. Strikes have been the order of the day. Several unsuccessful plots were hashed to overthrow the regime. Hugo Chavez responded by even more draconian and more repressive measures.

Il Commandante died of cancer in March 2013. His protégé and successor Nicolas Maduro has continued on the same revolutionary path, to the chagrin of the United States and the West. Unfortunately, Maduro is no Chavez. A former bus driver whom Chavez made foreign minister, he lacks the former president’s charisma and intelligence. And it was his misfortune to have come to power when global oil prices had collapsed.

The Trump administration recently announced that they recognise opposition leader Juan Guaido as the legitimate president of Venezuela. The EU and several Latin American members of the Lima Group have followed suit. The United States has announced intensification of crippling sanctions; threatening to use military force to effect regime change. The country may be on the verge of civil war.

Venezuela has been reduced to ruins. There are stories of hunger and starvation. More than a million children have dropped out of school. The incidence of poverty has skyrocketed to 82 percent. Some 35% of Venezuelans have been reduced to feeding from dustbins. Basic medicines and even toilet paper are beyond the reach of ordinary citizens. Violent crime, robbery and kidnapping are reaching crisis proportions. More than 3 million citizens have fled the country.

The tragedy that has befallen Venezuela can happen in any country. As a matter of fact, the economic structure of Venezuela is very similar to that of Nigeria. We are also an oil-dependent, rentier petrodollar economy. We also have high levels of poverty and inequality. Venezuela portends several lessons for us.

First, beware of populist demagogues. It is easy for masses of people to be seduced by the rhetoric of populist demagogues. It is even more dangerous if such demagogues are intelligent and charismatic.

Secondly, popular social welfare programmes must never be implemented at the expense of economic fundamentals. Anyone who understands practical economics would tell you that balancing the books within a national accounting framework is key to getting the policies right. Prudence requires that we never spend beyond our means. Keeping control over financial aggregates such as the exchange rate, interest rates and inflation is key to ensuring macroeconomic equilibrium.

Thirdly, we must avoid undue nationalism. A good economic manager must avoid the kind of rhetoric that drives away investors and kills local entrepreneurship. Creating a sound eco-system that attracts capital and talent is critical to ensuring long-term prosperity.

Finally, the rule of law, property rights and social cohesion are central to growth and economic development. There will always be a place for nationalism and patriotism. But restraint with moderation is vital. We must build our national economies with care, diligence and creativity. We must be as wise as serpents and as harmless as doves.

 


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