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Sunday
Feature
An
Empty Revolution
The
Unfulfilled Promises of Hugo Chávez
How
much I've to climb so they can come down?
By
Francisco Rodríguez
Even
critics of Hugo Chávez tend to concede that he has
made helping the poor his top priority. But in fact, Chávez's
government has not done any more to fight poverty than past
Venezuelan governments, and his much-heralded social programs
have had little effect. A close look at the evidence reveals
just how much Chávez's "revolution" has
hurt Venezuela's economy -- and that the poor are hurting
most of all.
On December 2, when Venezuelans delivered President Hugo Chávez
his first electoral defeat in nine years, most analysts were
taken by surprise. According to official results, 50.7 percent
of voters rejected Chávez's proposed constitutional
reform, which would have expanded executive power, gotten rid
of presidential term limits, and paved the way for the construction
of a "socialist" economy. It was a major reversal
for a president who just a year earlier had won a second six-year
term with 62.8 percent of the vote, and commentators scrambled
to piece together an explanation. They pointed to idiosyncratic
factors, such as the birth of a new student movement and the
defection of powerful groups from Chávez's coalition.
But few went so far as to challenge the conventional wisdom
about how Chávez has managed to stay in power for so
long.
Although
opinions differ on whether Chávez's rule should
be characterized as authoritarian or democratic, just about
everyone appears to agree that, in contrast to his predecessors,
Chávez has made the welfare of the Venezuelan poor his
top priority. His government, the thinking goes, has provided
subsidized food to low-income families, redistributed land
and wealth, and poured money from Venezuela's booming oil industry
into health and education programs. It should not be surprising,
then, that in a country where politics was long dominated by
rich elites, he has earned the lasting support of the Venezuelan
poor.
That story
line may be compelling to many who are rightly outraged by
Latin America's deep social and economic inequalities.
Unfortunately, it is wrong. Neither official statistics nor
independent estimates show any evidence that Chávez
has reoriented state priorities to benefit the poor. Most health
and human development indicators have shown no significant
improvement beyond that which is normal in the midst of an
oil boom. Indeed, some have deteriorated worryingly, and official
estimates indicate that income inequality has increased. The "Chávez
is good for the poor" hypothesis is inconsistent with
the facts.
My skepticism
of this notion began during my tenure as chief economist
of the Venezuelan National Assembly. In September
2000, I left American academia to take over a research team
with functions broadly similar to those of the U.S. Congressional
Budget Office. I had high expectations for Chávez's
government and was excited at the possibility of working in
an administration that promised to focus on fighting poverty
and inequality. But I quickly discovered how large the gap
was between the government's rhetoric and the reality of its
political priorities.
Soon after
joining the National Assembly, I clashed with the administration
over underfunding of the Consolidated Social
Fund (known by its Spanish acronym FUS), which had been created
by Chávez to coordinate the distribution of resources
to antipoverty programs. The law establishing the fund included
a special provision to ensure that it would benefit from rising
oil revenues. But when oil revenues started to go up, the Finance
Ministry ignored the provision, allocating to the fund in the
2001 budget only $295 million -- 15 percent less than the previous
year and less than a third of the legally mandated $1.1 billion.
When my office pointed out this inconsistency, the Finance
Ministry came up with the creative accounting gimmick of rearranging
the law so that programs not coordinated by the FUS would nevertheless
appear to be receiving resources from it. The effect was to
direct resources away from the poor even as oil profits were
surging. (Hard-liners in the government, incensed by my office's
criticisms, immediately called for my ouster. When the last
moderates, who understood the need for an independent research
team to evaluate policies, left the Chávez camp in 2004,
the government finally disbanded our office.)
Chávez's political success does not stem from the achievements
of his social programs or from his effectiveness at redistributing
wealth. Rather, through a combination of luck and manipulation
of the political system, Chávez has faced elections
at times of strong economic growth, currently driven by an
oil boom bigger than any since the 1970s. Like voters everywhere,
Venezuelans tend to vote their pocketbooks, and until recently,
this has meant voting for Chávez. But now, his mismanagement
of the economy and failure to live up to his pro-poor rhetoric
have finally started to catch up with him. With inflation accelerating,
basic foodstuffs increasingly scarce, and pervasive chronic
failures in the provision of basic public services, Venezuelans
are starting to glimpse the consequences of Chávez's
economic policies -- and they do not like what they see.
FAKE LEFT
From the
moment he reached office in 1999, Chávez presented
his economic and social policies as a left-wing alternative
to the so-called Washington consensus and a major departure
from the free-market reforms of previous administrations. Although
the differences were in fact fairly moderate at first, the
pace of change accelerated significantly after the political
and economic crisis of 2002-3, which saw a failed coup attempt
and a two-month-long national strike. Since then, the Venezuelan
economy has undergone a transformation.
The change can be broadly characterized as having four basic
dimensions. First, the size of the state has increased dramatically.
Government expenditures, which represented only 18.8 percent
of GDP in 1999, now account for 29.4 percent of GDP, and the
government has nationalized key sectors, such as electricity
and telecommunications. Second, the setting of prices and wages
has become highly regulated through a web of restrictions in
place since 2002 ranging from rigid price and exchange controls
to a ban on laying off workers. Third, there has been a significant
deterioration in the security of property rights, as the government
has moved to expropriate landholdings and private firms on
an ad hoc basis, appealing to both political and economic motives.
Fourth, the government has carried out a complete overhaul
of social policy, replacing existing programs with a set of
high-profile initiatives -- known as the misiones, or missions
-- aimed at specific problems, such as illiteracy or poor health
provision, in poor neighborhoods.
Views
differ on how desirable the consequences of many of these
reforms are, but a broad consensus appears to have emerged
around the idea that they have at least brought about a significant
redistribution of the country's wealth to its poor majority.
The claim that Chávez has brought tangible benefits
to the Venezuelan poor has indeed by now become commonplace,
even among his critics. In a letter addressed to President
George W. Bush on the eve of the 2006 Venezuelan presidential
elections, Jesse Jackson, Cornel West, Dolores Huerta, and
Tom Hayden wrote, "Since 1999, the citizens of Venezuela
have repeatedly voted for a government that -- unlike others
in the past -- would share their country's oil wealth with
millions of poor Venezuelans." The Nobel laureate economist
Joseph Stiglitz has noted, "Venezuelan President Hugo
Chávez seems to have succeeded in bringing education
and health services to the barrios of Caracas, which previously
had seen little of the benefits of that country's rich endowment
of oil." Even The Economist has written that "Chávez's
brand of revolution has delivered some social gains."
One would
expect such a consensus to be backed up by an impressive
array of evidence. But in fact, there is remarkably little
data supporting the claim that the Chávez administration
has acted any differently from previous Venezuelan governments
-- or, for that matter, from those of other developing and
Latin American nations -- in redistributing the gains from
economic growth to the poor. One oft-cited statistic is the
decline in poverty from a peak of 54 percent at the height
of the national strike in 2003 to 27.5 percent in the first
half of 2007. Although this decline may appear impressive,
it is also known that poverty reduction is strongly associated
with economic growth and that Venezuela's per capita GDP grew
by nearly 50 percent during the same time period -- thanks
in great part to a tripling of oil prices. The real question
is thus not whether poverty has fallen but whether the Chávez
government has been particularly effective at converting this
period of economic growth into poverty reduction. One way to
evaluate this is by calculating the reduction in poverty for
every percentage point increase in per capita income -- in
economists' lingo, the income elasticity of poverty reduction.
This calculation shows an average reduction of one percentage
point in poverty for every percentage point in per capita GDP
growth during this recovery, a ratio that compares unfavorably
with those of many other developing countries, for which studies
tend to put the figure at around two percentage points. Similarly,
one would expect pro-poor growth to be accompanied by a marked
decrease in income inequality. But according to the Venezuelan
Central Bank, inequality has actually increased during the
Chávez administration, with the Gini coefficient (a
measure of economic inequality, with zero indicating perfect
equality and one indicating perfect inequality) increasing
from 0.44 to 0.48 between 2000 and 2005.
Poverty
and inequality statistics, of course, tell only part of the
story. There are many aspects of the well-being of the
poor not captured by measures of money income, and this is
where Chávez's supporters claim that the government
has made the most progress -- through its misiones, which have
concentrated on the direct provision of health, education,
and other basic public services to poor communities. But again,
official statistics show no signs of a substantial improvement
in the well-being of ordinary Venezuelans, and in many cases
there have been worrying deteriorations. The percentage of
underweight babies, for example, increased from 8.4 percent
to 9.1 percent between 1999 and 2006. During the same period,
the percentage of households without access to running water
rose from 7.2 percent to 9.4 percent, and the percentage of
families living in dwellings with earthen ?oors multiplied
almost threefold, from 2.5 percent to 6.8 percent. In Venezuela,
one can see the misiones everywhere: in government posters
lining the streets of Caracas, in the ubiquitous red shirts
issued to program participants and worn by government supporters
at Chávez rallies, in the bloated government budget
allocations. The only place where one will be hard-pressed
to find them is in the human development statistics.
Remarkably,
given Chávez's rhetoric and reputation,
official figures show no significant change in the priority
given to social spending during his administration. The average
share of the budget devoted to health, education, and housing
under Chávez in his first eight years in office was
25.12 percent, essentially identical to the average share (25.08
percent) in the previous eight years. And it is lower today
than it was in 1992, the last year in office of the "neoliberal" administration
of Carlos Andrés Pérez -- the leader whom Chávez,
then a lieutenant colonel in the Venezuelan army, tried to
overthrow in a coup, purportedly on behalf of Venezuela's neglected
poor majority.
In a number
of recent studies, I have worked with colleagues to look
more systematically at the results of Chávez's
health and education misiones. Our findings confirm that Chávez
has in fact done little for the poor. For example, his government
often claims that the influx of Cuban doctors under the Barrio
Adentro health program is responsible for a decline in infant
mortality in Venezuela. In fact, a careful analysis of trends
in infant and neonatal mortality shows that the rate of decline
is not significantly different from that of the pre-Chávez
period, nor from the rate of decline in other Latin American
countries. Since 1999, the infant mortality rate in Venezuela
has declined at an annual rate of 3.4 percent, essentially
identical to the 3.3 percent rate at which it had declined
during the previous nine-year period and lower than the rates
of decline for the same period in Argentina (5.5 percent),
Chile (5.3 percent), and Mexico (5.2 percent).
Even more
disappointing are the results of the government's Robinson
literacy program. On October 28, 2005, Chávez
declared Venezuela "illiteracy-free territory." His
national literacy campaign, he announced, had taught 1.5 million
people how to read and write, and the education minister stated
that residual illiteracy stood at less than 0.1 percent of
the population. The achievement received considerable international
recognition and was taken at face value by many specialists
as well as by casual observers. A recent article in the San
Francisco Chronicle, for example, reported that "illiteracy,
formerly at 10 percent of the population, has been completely
eliminated." Spanish President José Luis Rodríguez
Zapatero and UNESCO's general director, Koïchiro Matsuura,
sent the Venezuelan government public letters of congratulation
for the achievement. (After Matsuura's statement, the Chávez's
administration claimed that its eradication of illiteracy had
been "UNESCO-verified.")
But along with Daniel Ortega of Venezuela's IESA business
school, I looked at trends in illiteracy rates based on responses
to the Venezuelan National Institute of Statistics' household
surveys. (A full presentation of our study will appear in the
October 2008 issue of the journal Economic Development and
Cultural Change.) In contrast to the government's claim, we
found that there were more than one million illiterate Venezuelans
by the end of 2005, barely down from the 1.1 million illiterate
persons recorded in the first half of 2003, before the start
of the Robinson program. Even this small reduction, moreover,
is accounted for by demographic trends rather than the program
itself. In a battery of statistical tests, we found little
evidence that the program had had any statistically distinguishable
effect on Venezuelan illiteracy. We also found numerous inconsistencies
in the government's story. For example, it claims to have employed
210,410 trainers in the anti-illiteracy effort (approximately
two percent of the Venezuelan labor force), but there is no
evidence in the public employment data that these people were
ever hired or evidence in the government budget statistics
that they were ever paid.
THE ECONOMIC CONSEQUENCES OF MR. Chávez
In fact,
even as the conventional wisdom has taken hold outside of
Venezuela, most Venezuelans, according to opinion surveys,
have long been aware that Chávez's social policies are
inadequate and ineffective. To be sure, Venezuelans would like
the government's programs -- particularly the sale of subsidized
food -- to remain in place, but that is a far cry from believing
that they have reasonably addressed the nation's poverty problem.
A survey taken by the Venezuelan polling firm Alfredo Keller
y Asociados in September 2007 showed that only 22 percent of
Venezuelans think poverty has improved under Chávez,
while 50 percent think it has worsened and 27 percent think
it has stayed the same.
At the same
time, however, Venezuelan voters have given Chávez
credit for the nation's strong economic growth. In polls, an
overwhelming majority have expressed support for Chávez's
stewardship of the economy and reported that their personal situation
was improving. This is, of course, not surprising: with its economy
buoyed by surging oil profits, Venezuela had enjoyed three consecutive
years of double-digit growth by 2006.
But by
late 2007, Chávez's economic model had begun
to unravel. For the first time since early 2004, a majority
of voters claimed that both their personal situation and
the country's situation had worsened during the preceding
year. Scarcities in basic foodstuffs, such as milk, black
beans,
and sardines, were chronic, and the difference between
the official and the black-market exchange rate reached 215
percent.
When the Central Bank board received its November price
report indicating that monthly inflation had risen to 4.4
percent
(equivalent to an annual rate of 67.7 percent), it decided
to delay publication of the report until after the vote
on the constitutional reform was held.
This growing
economic crisis is the predictable result of the gross mismanagement
of the economy by Chávez's economic
team. During the past five years, the Venezuelan government
has pursued strongly expansionary fiscal and economic policies,
increasing real spending by 137 percent and real liquidity
by 218 percent. This splurge has outstripped even the expansion
in oil revenues: the Chávez administration has managed
the admirable feat of running a budget deficit in the midst
of an oil boom.
Such expansionary policies were appropriate during the deep
recession that Venezuela faced in the aftermath of the political
and economic crisis of 2002-3. But by continuing the expansion
after the recession ended, the government generated an inflationary
crisis. The problem has been compounded by efforts to address
the resulting imbalances with an increasingly complex web of
price and exchange controls coupled with routine threats of
expropriation directed at producers and shopkeepers as a warning
not to raise prices. Not surprisingly, the response has been
a steep drop in food production and widening food scarcity.
A sensible
solution to Venezuela's overexpansion would require reining
in spending and the growth of the money supply. But
such a solution is anathema to Chávez, who has repeatedly
equated any call for spending reductions with neoliberal
dogma. Instead, the government has tried to deal with inflation
by
expanding the supply of foreign currency to domestic firms
and consumers and increasing government subsidies. The
result is a highly distorted economy in which the government
effectively
subsidizes two-thirds of the cost of imports and foreign
travel for the wealthy while the poor cannot find basic
food items
on store shelves. The astounding growth of imports, which
have nearly tripled since 2002 (imports of such luxury
items as
Hummers and 15-year-old Scotch have grown even more dramatically),
is now threatening to erase the nation's current account
surplus.
What is
most distressing is how predictable all of this was. Indeed,
Cháveznomics is far from unprecedented: the
gross contours of this story follow the disastrous experiences
of many Latin American countries during the 1970s and 1980s.
The economists Rudiger Dornbusch and Sebastian Edwards have
characterized such policies as "the macroeconomics of
populism." Drawing on the economic experiences of administrations
as politically diverse as Juan Perón's in Argentina,
Salvador Allende's in Chile, and Alan García's in
Peru, they found stark similarities in economic policies
and in the
resulting economic evolution. Populist macroeconomics is
invariably characterized by the use of expansionary fiscal
and economic
policies and an overvalued currency with the intention of
accelerating growth and redistribution. These policies are
commonly implemented
in the context of a disregard for fiscal and foreign exchange
constraints and are accompanied by attempts to control inflationary
pressures through price and exchange controls. The result
is by now well known to Latin American economists: the emergence
of production bottlenecks, the accumulation of severe fiscal
and balance-of-payments problems, galloping inflation, and
plummeting real wages.
Chávez's
behavior is typical of such populist economic experiments.
The initial successes tend to embolden policymakers,
who increasingly believe that they were right in dismissing
the recommendations of most economists. Rational policy
formulation becomes increasingly difficult, as leaders become
convinced
that conventional economic constraints do not apply to
them. Corrective measures only start to be taken when the
economy
has veered out of control. But by then it is far too late.
My experience
dealing with the Chávez government confirmed
this pattern. In February 2002, for example, I had the opportunity
of speaking with Chávez at length about the state of
the Venezuelan economy. At that point, the economy had entered
into a recession as a result of an unsustainable fiscal expansion
carried out during Chávez's first three years in office.
Moderates within the government had arranged the meeting with
the hope that it would spur changes in the management of the
public finances. As a colleague and I explained to Chávez,
there was no way to avoid a deepening of the country's macroeconomic
crisis without a credible effort to raise revenue and rationalize
expenditures. The president listened with interest, taking
notes and asking questions over three hours of conversation,
and ended our meeting with a request that we speak with his
cabinet ministers and schedule future meetings. But as we proceeded
to meet with officials, the economic crisis was spilling over
into the political arena, with the opposition calling for street
demonstrations in response to Chávez's declining poll
numbers. Soon, workers at the state oil company, PDVSA, joined
the protests.
In the
ensuing debate within the government over how to handle the
political crisis, the old-guard leftists persuaded Chávez
to take a hard line. He dismissed 17,000 workers at PDVSA and
sidelined moderates within his government. When I received
a call informing me that our future meetings with Chávez
had been canceled, I knew that the hard-liners had gained the
upper hand. Chávez's handling of the economy and the
political crisis had significant costs. Chávez deftly
used the mistakes of the opposition (calling for a national
strike and attempting a coup) to deflect blame for the recession.
But in fact, real GDP contracted by 4.4 percent and the currency
had lost more than 40 percent of its value in the first quarter
of 2002, before the start of the first PDVSA strike on April
9. As early as January of that year, the Central Bank had
already lost more than $7 billion in a futile attempt to
defend the
currency. In other words, the economic crisis had started
well before the political crisis -- a fact that would be
forgotten
in the aftermath of the political tumult that followed.
The government's
response to the crisis has had further consequences for the
Venezuelan economy. The takeover of PDVSA by Chávez
loyalists and the subordination of the firm's decisions to
the government's political imperatives have resulted in a dramatic
decline in Venezuela's oil-production capacity. Production
has been steadily declining since the government consolidated
its control of the industry in late 2004. According to OPEC
statistics, Venezuela currently produces only three-quarters
of its quota of 3.3 million barrels a day. Chávez's
government has thus not only squandered Venezuela's largest
oil boom since the 1970s; it has also killed the goose that
lays the golden egg. Despite rising oil prices, PDVSA is
increasingly strained by the combination of rising production
costs, caused
by the loss of technical capacity and the demands of a growing
web of political patronage, and the need to finance numerous
projects for the rest of the region, ranging from the rebuilding
of Cuban refineries to the provision of cheap fuel to Sandinista-controlled
mayoralties in Nicaragua. As a result, the capacity of oil
revenues to ease the government's fiscal constraints is becoming
more and more limited.
PLOWING THE SEA
Simón Bolívar, Venezuela's independence leader
and Chávez's hero, once said that in order to evaluate
revolutions and revolutionaries, one needs to observe them
close up but judge them at a distance. Having had the opportunity
to do both with Chávez, I have seen to what extent he
has failed to live up to his own promises and Venezuelans'
expectations. Now, voters are making the same realization --
a realization that will ultimately lead to Chávez's
demise. The problems of ensuring a peaceful political transition
will be compounded by the fact that over the past nine years
Venezuela has become an increasingly violent society. This
violence is not only reflected in skyrocketing crime rates;
it also affects the way Venezuelans resolve their political
conflicts. Whether Chávez is responsible for this or
not is beside the point. What is vital is for Venezuelans to
find a way to prevent the coming economic crisis from igniting
violent political conflict. As Chávez's popularity begins
to wane, the opposition will feel increasingly emboldened to
take up initiatives to weaken Chávez's movement. The
government may become increasingly authoritarian as it starts
to understand the very high costs it will pay if it loses power.
Unless a framework is forged through which the government and
the opposition can reach a settlement, there is a significant
risk that one or both sides will resort to force.
Looking
back, one persistent question (in itself worthy of a potentially
fascinating study in international political
economy) will be how the Venezuelan government has been able
to convince so many people of the success of its antipoverty
efforts despite the complete absence of real evidence of
their effectiveness. When such a study is written, it is likely
that
the Chávez administration's strategy of actively lobbying
foreign governments and launching a high-profile public relations
campaign -- spearheaded by the Washington-based Venezuela
Information Office -- will be found to have played a vital
role. The generous
disbursement of loans to cash-strapped Latin American and
Caribbean nations, the sale of cheap oil and heating gas
to support political
allies in the developed and developing worlds, and the covert
use of political contributions to buy the loyalty of politicians
in neighboring countries must surely form part of the explanation
as well.
But perhaps
an even more important reason for this success is the willingness
of intellectuals and politicians in developed
countries to buy into a story according to which the dilemmas
of Latin American development are explained by the exploitation
of the poor masses by wealthy privileged elites. The story
of Chávez as a social revolutionary finally redressing
the injustices created by centuries of oppression fits nicely
into traditional stereotypes of the region, reinforcing the
view that Latin American underdevelopment is due to the vices
of its predatory governing classes. Once one adopts this
view, it is easy to forget about fashioning policy initiatives
that
could actually help Latin America grow, such as ending the
agricultural subsidies that depress the prices of the region's
exports or significantly increasing the economic aid given
to countries undertaking serious efforts to combat poverty.
The American
journalist Sydney Harris once wrote that "we
believe what we want to believe, what we like to believe, what
suits our prejudices and fuels our passions." The idea
that Latin American governments are controlled by economic
elites may have been true in the nineteenth century, but is
wildly at odds with reality in a world in which every Latin
American country except Cuba has regular elections with large
levels of popular participation. Much like governments everywhere,
Latin American governments try to balance the desire for wealth
redistribution with the need to generate incentives for economic
growth, the realities of limited effective state power, and
the uncertainties regarding the effectiveness of specific policy
initiatives. Ignoring these truths is not only anachronistic
and misguided; it also thwarts the design of sensible foreign
policies aimed at helping the region's leaders formulate and
implement strategies for achieving sustainable and equitable
development.
It would be foolhardy to claim that what Latin America must
do to lift its population out of poverty is obvious. If there
is a lesson to be learned from other countries' experiences,
it is that successful development strategies are diverse and
that what works in one place may not work elsewhere. Nonetheless,
recent experiences in countries such as Brazil and Mexico,
where programs skillfully designed to target the weakest groups
in society have had a significant effect on their well-being,
show that effective solutions are within the reach of pragmatic
policymakers willing to implement them. It is the tenacity
of these realists -- rather than the audacity of the idealists
-- that holds the greatest promise for alleviating the plight
of Latin America's poor.
Francisco
Rodríguez, Assistant Professor of Economics
and Latin American Studies at Wesleyan University, was Chief
Economist of the Venezuelan National Assembly from 2000 to
2004.Petroleumworld does not necessarily share these views
Editor's
Note: This article was originally published by Foreign Affairs,
on March/April 2008, Volume 87, No. 2. Petroleumworld
reprint this article in the interest of our readers.
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Petroleumworld
02/24/08
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