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Editorial/Opinion

 

Noah Smith: A socialist
revolution can ruin a country



Masses of Venezuelans are starving and the government prioritizes arming “criminals” on motorcycles and corrupt army officers over feeding people.

 

Venezuela's economy has been in decline for a long time now, but a spate of recent news articles highlights how bad the situation has become. The Atlantic has a list of vivid anecdotes showing how economic breakdown has led to social breakdown. My favorite -- in a horror-story, I'm-so-glad-this-isn't-happening-in-my-country kind of way -- was the story of a business owner caught between a union demanding toilet paper and a government determined to punish anyone who has more than a couple of rolls. It's a Catch-22 straight out of a dystopian novel.  Meanwhile, the New York Times reports on the deteriorating state of Venezuelan medical care. The situation has prompted the government to declare a state of emergency, which given Venezuelan President Nicolas Maduro's record, seems likely to make things worse.

Venezuela's Revolution

Why is this happening? Economists don't have any good general models of political economy, government dysfunction or social collapse. And although we could in principle gain some clues about which policies did the most harm, this would require administrative data of the type rarely available in a dysfunctional country such as Venezuela. With no reliable overarching theory and little hard data, we can't just conclude -- as many on the right would have us do -- that disasters like Venezuela are the inevitable and obvious result of efforts to make society better for the poor. We're left mostly with historical analogy, casual observation and vague theories about what makes countries succeed or fail.

Normally this makes for lively yet inconclusive debate. But in a situation as severe as Venezuela's, it's fairly clear to identify the major policy culprits. As Moises Naim and Francisco Toro write in the Atlantic, most of the blame here has to fall on the policies of Hugo Chavez, who ruled Venezuela from 1999 until his death in 2013, and his successors:

It's true that oil prices have…fallen…but that can hardly explain what's happened: Venezuela's garish implosion began well before the price of oil plummeted. Back in 2014, when oil was still trading north of $100 per barrel , Venezuelans were already facing acute shortages of basic things like bread or toiletries.

The real culprit is chavismo , the ruling philosophy named for Chavez and carried forward by Maduro, and its truly breathtaking propensity for mismanagement.

Price controls -- an attempt to deal with Venezuela's runaway hyperinflation -- seem to have been an especially harmful policy. Pegging the prices of daily necessities at low levels led to shortages -- everyone rushed out to buy the cheap stuff, leaving store shelves bare. The government then responded with the typical but misguided strategy of punishing  those it deemed hoarders, which required the police to go around arresting anyone who seemed to have too much of a commodity. Unfortunately, since no one knows how much is too much, least of all the police, this generally leads to people being arrested for owning necessary amounts of things like food and toilet paper. This was especially hard on businesses, which were stuck in the middle. Everyone starts living in fear of the police, business can't be done and the economy breaks down.

Could Venezuela's troubles have been caused by the actions of foreign governments or corporations? The few remaining Chavez defenders (including Maduro ) tend to make this claim, but it just doesn't make much sense. The timing is all wrong -- foreign efforts to discredit or overthrow Chavez were probably most intense when he was still alive. The 2015 oil price plunge was certainly a blow to Venezuela's already ailing economy. Yet petrostates such as Russia and Iran have been only staggered, not knocked out, by the oil crash.

It seems much more likely that Venezuela has suffered a variant of the fate of other countries that turned to socialist revolutions. Cuba's planned economy didn't collapse, but it has stagnated for decades. India's experiments with socialism also led to decades of slow growth, until 1990s reforms undid much of the damage. Yet Cuba and pre-1990 India are wonderful outcomes compared with North Korea, which continues to be an impoverished nightmare state, or China under Mao Zedong. Eastern European economies also fared badly under their imposed communist regimes.

Does this mean socialism is a failure? Certainly not. The economies of Germany, France, Denmark, Sweden, and the U.K. have their problems, but policies like nationalized health care haven't prevented them from becoming rich, comfortable societies. Meanwhile, many of our most cherished economic institutions, like weekends breaks from work, overtime rules and Social Security, owe their existence to the socialist movements of the 19th and early 20th centuries.

So when does socialism fail, and when does it succeed? That's a big question, and any answer will necessarily be too glib, but I do sense a general pattern in the historical record. Countries that have implemented socialism gradually, by tweaking economic institutions and making reforms one by one, have generally stayed healthy. When socialism seemed to be hurting economic performance, countries could dial back redistribution and nationalization before things got really bad. But when countries try to transition to an extreme socialism all at once, they almost always botch it. And since institutions tend to be persistent -- “sticky,” in the lingo of economics -- the errors of these socialist big bangs, once committed, usually prove hard to undo.

That's why it's so important for the left to go slowly. Frustration with the political process, combined with years of free-market dominance, make many leftist thinkers eager to push the U.S. abruptly in the opposite direction. When center-left thinkers like Paul Krugman and Brad DeLong tried to restrain the excesses of economists who were over-hyping Bernie Sanders' economic policy program, many leftists accused them of “ hippie-punching ,” and claimed that their sensible approach would play into the hands of plutocrats.

But these criticisms are misplaced, and Venezuela shows why. The center-left is the essential bulwark against the kind of aggressive policy mistakes that have doomed dozens of socialist revolutions to dysfunction and collapse. The historically successful approach to economic reform is to “cross the river by feeling the stones” -- a phrase coined by Chinese leader Deng Xiaoping, who undid much of the economic damage done by his predecessors. Gradual reform, not revolution, is a proven winner when it comes to improving the lives of society's least fortunate.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Bloomberg on May. 18, 2016. Petroleumworld reprint this article in the interest of our readers.

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