Business

03.07.13

Why Hugo Chavez Was Bad for Venezuela

It's no good doing redistribution if you don't have anything to distribute in the first place.

I've been a bit befuddled by some of what my colleage Michael Moynihan terms "love letters" to the departed Hugo Chavez (such a sonorous voice rolling out of the television for hours on end!  Pity he was insufficiently authoritarian, though).  

Now, I am sad that Hugo Chavez is dead, because it is always sad when a human being dies, and a universe ends.  And I felt no particular urgency, after he died, in writing the obligatory piece pointing out that Hugo Chavez was a strongman with profoundly anti-democratic tendencies, who believed in elections only insofar as they suited him, and also, has left Venezuela's economy in a parlous long-term position.  But then people started defending--or minimizing to the point of untruth--the clearly indefensible.  Moreover, my Facebook feed lit up with people stating, as a fact, that capitalists just hate Hugo Chavez because he gave stuff to the poor.

So it seems worthwhile to point out that in the long run, Hugo Chavez was probably bad for the poor of Venezuela; that he would have already been very bad for the poor of Venezuela if he had not been happily bailed out by the world oil market; and that even beyond his mismanagement of the economy, Hugo Chavez should not command respect.  His means were despicable, even if you agree with the ends.

Last item first.  William Dobson writes the brief for the prosecution:

[U]nlike Castro and many other autocrats, Chávez didn’t fear elections; He embraced them. Most opposition leaders will tell you that Venezuelan elections are relatively clean. The problem isn’t Election Day—It’s the other 364 days. Rather than stuffing ballot boxes, Chávez understood that he could tilt the playing field enough to make it nearly impossible to defeat him. Thus, the regime’s electoral wizards engineered gerrymandering schemes that made anything attempted in the American South look like child’s play. Chávez’s campaign coffers were fed by opaque slush funds holding billions in oil revenue. The government’s media dominance drowned out the opposition. Politicians who appeared formidable were simply banned from running for office. And the ruling party became expert in using fear and selective intimidation to tamp down the vote. Chávez took a populist message and married it to an autocratic scheme that allowed him to consolidate power. The net effect over Chávez’s years was a paradoxical one: With each election Venezuela lost more of its democracy.

He doesn't even mention the rules by which Venezuelan television stations were required to carry government propaganda, including hours of Chavez speeches, or risk being shut down.

To which, so far as I can tell, the supporters of Chavez rejoinder thusly: the poor loved him. And he had a rolling, sonorous voice.  Plus all the right enemies, of course; how could we help but love someone who claimed that George W. Bush was literally, physically, Satan?  Strange that this story seems to pop up so often; I haven't noticed so much love on the left for anyone else who claims that the devil is literally, physically walking the earth right now.

I'll leave it at that, because I'm not prepared to carry on a debate right now as to whether it's okay to crush potential political rivals and effectively take over the media for use as a propaganda organ of the state.  If you think it is okay to do these things as long as you do them in the name of the poor, well, we're not going to convince each other, that's all.  

So instead, let's talk about the poor, and how well they fared under Chavez. It looks to me as if Chavez's government made substantial improvements in things like primary school completion, progression to secondary education, and so forth.  (The World Bank's statistics on Venezuela are surprisingly patchy, so this limits the number of variables I could look at).  Poverty rates have fallen.  This is all genuinely good news that happened on his watch.

But in the course of these achievements, he severely compromised the engine of Venezuela's future prosperity: its oil fields. And over the long run, the poor cannot thrive if the economy is failing.  

To be sure, Venezuela's economy looks okay in many respects; it's growth is about average for the region, as you can see in this graph from The Economist.  

But hey, wait a minute . . . shouldn't the country with some of the largest proven oil reserves in the world be doing better than the regional average?

Looked at in the context of Latin America as a whole, the poverty reduction achieved doesn't look so special either:

Oil prices are booming, but Venezuela is not.  Why? Because they're pumping less oil than they used to.

A couple of years after he took power, Chavez moved to consolidate his power over PDVSA, the state-owned oil company that used to rival Saudi's Aramco as the best-run in the world.  It needed to be.  Venezuela's heavy, sulfurous oil is hard to get out of the ground and refine; they had to invest heavily just to keep production flowing.  

The power grab was not popular in the oil industry, and ended up being one of the motivations for a 2002 coup attempt.  When that failed, a general strike followed, which temporarily shut down the oil industry.  After the smoke cleared, PDVSA was a changed entity.  It had suffered a sizeable brain drain, since over a third of its workforce was fired by Chavez for dereliction of duty.  And it became a slush fund for those beloved social programs.  Here's the result:

Venezuela's oil output has fallen by almost a third since Chavez took power.  That's why Venezuelan economic growth is pretty underwhelming.  Those social programs so beloved of Nation writers came out of investment funds that were previously used to keep oil production high--necessary, as we've discussed, because Venezuela's sludgy crude is hard to get out of the ground.   Which gives us a paradox: Venezuela's reserves are growing, but its production is in decline.

The only reason that the economy isn't worse is that oil prices have stayed high.  But with production falling, Venezuela doesn't just need high oil prices, but continuously rising oil prices, to keep funding all that government spending.  This is why Venezuela has been one of the hawkiest hawks in OPEC, always agitating for tighter quotas and higher prices.  A country with falling production doesn't need to worry about tighter quotas.  But they do need to worry that lower prices will throw their budget disastrously out of balance.  

Venezuela either needs to turn this around, or find alternative sources of strength for the economy.  But turnaround is difficult; as I understand it, investing in oil fields is not like investing in your 401(k), something you can do whenever you have some spare cash.  If you don't do continuous maintenance, you may permanently lose some of your recoverable oil. I've heard concerns that this has happened in Venezuela, though obviously, I am not a petroleum engineer or a geologist, so I can't really evaluate those claims.  At a minimum, this argues for stepping up investment sooner rather than later.

As for building some alternatives to Venezuela's heavy dependence on the oil markets, well, Chavismo has actually taken the country in the opposite direction--it is, as Dobson notes, "more dependent on crude exports than when Chávez arrived".  In fact, the graphs above understate the economic problem: for example, they don't capture the havoc that has been wreaked by price controls, slapped on in a futile attempt to keep runaway inflation from hurting the poor:

Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition.

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil.

The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf.

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

They also don't show the spiking crime, enormous fiscal deficits, and near-complete lack of business development outside the oil sector.

The cracks have been showing for a while, but Chavez has been able to paper over them with excuses (it's all the fault of George Bush, the Great Satan!) and emergency measures.  Unfortunately, you can't hold together a high-tech oil drilling economy with baling wire and chewing gum.  Especially since other countries are bringing more "unconventional oil" onto the market, which is going to put some downward pressure on oil prices.  Even a moderate fall in the price could put Venezuela into a whole lot of hurt.  

Politically, what Chavez did was successful.  But that success came at the cost of the future.  Instead of building a more stable foundation for long-term prosperity, Chavez started cutting chunks out of the house and handing them out to the crowd.  Socialists, especially, take note: he essentially destroyed one of the most competent, successful, state run companies in the world.  Thirty years from now, that--and not the transitory social programs that were thereby funded--will be his real legacy to Venezuela.