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Venezuela: Forty Years of Economic Decline

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Tags Corporate WelfareThe Police State

05/17/2017

This is Part Two of a two-part series. Part One is here.

The brunt of the blame for Venezuela’s current economic catastrophe should fall on Hugo Chávez and his successor Nicolás Maduro. However, this does not mean that all was well in Venezuela before Chávez arrived on the scene. The ideological and institutional seeds of the current crises were sown decades earlier. A rising tide of government interventions in the marketplace during the 1960s and 1970s would soon lead to a host of new problems for Venezuela.

The Oil Boom Party Ends

The 1970s looked like a never-ending boom period for Venezuela thanks to high oil prices. The then-President Carlos Andrés Pérez took full advantage of this boom to implement his lavish social spending program. Eventually, the boom period came to a crashing halt by the early 80s, and Venezuela had to face a harsh economic downturn.

Luis Herrera Campins would succeed Carlos Andrés Pérez’s government. From the start, he came to the realization that Pérez’s spending bonanza was unsustainable. In fact, Herrera had choice words for Pérez's policies, claiming that Pérez left him a "mortgaged" country.

Although Herrera was correct in his assessment of the Pérez administration’s fiscal irresponsibility, he would ironically continue more of the same cronyist policies as his predecessor. The chickens eventually came to roost as Venezuela experienced its very own “Black Friday.”

What once was one of the world’s most stable currencies, the Bolívar, experienced it’s most significant devaluation to date. Unfortunately, Herrera’s administration responded with heavy-handed exchange controls to stem capital flight. These controls would be administered by an agency called the “Differential Exchange Rate Regime” (RECADI), effectively creating a multi-tiered system of exchange rates.

Considerable corruption scandals emerged during the succeeding government of Jaime Lusinchi, as countless members of the political class would exploit the multi-tiered exchange rate system for their own gain.

Despite its abolition in 1989, RECADI would serve as a precursor to the byzantine exchange rate systems that the Commission for the Administration of Currency Exchange (CADIVI) and its successor, the National Center for Foreign Commerce (CENCOEX), would later preside over during the United Socialist Party of Venezuela’s period of dominance throughout the 2000s.

All in all, Venezuela’s Black Friday devaluation marked the beginning of a lost decade of sorts for Venezuela throughout the 1980s that set the stage for subsequent devaluations, currency controls, and irresponsible fiscal policy further down the line.

IMF to the Rescue?

Rising poverty rates, increased foreign and public debt, corrupt state enterprises, and burdensome regulations contributed to an environment of growing social tension and economic malaise throughout the 1980s. Venezuela’s previous growth miracle became an afterthought at this point. And it’s golden goose, oil, could not bail it out thanks to the low oil prices of the 1980s.

For Venezuela to right its ship, it would have to undergo painful fiscal reforms.

Ironically, it was Carlos Andrés Pérez that was entrusted with reigning in the excessive government largesse; the very same leader that established Venezuela’s profligate welfare state and laid the foundations for its collapse in the 1980s.

In 1988, Pérez campaigned on a platform that promised to bring back the splendor and prosperity of the 1970s. But once he assumed the presidency, Pérez realized that the Venezuela before him was on the verge of bankruptcy and crippled by excessive state intervention in the economy.

Under the auspices of the IMF, Pérez made a half-hearted attempt in reforming Venezuela’s broken petrostate. When broken down and analyzed, these reforms consisted of tariff reductions, tax hikes, flawed privatizations, and marginal spending cuts that ultimately did not address the underlying problems with the Venezuelan political economy — its flawed monetary policy, burdensome regulatory framework, and entrenched crony capitalist policies.

However, these reforms were too much for Pérez’s very own party, Acción Democrática (AD). AD was incensed by these reforms that hacked away at certain facets of the cronyist petrostate that it depended on to maintain its political power.

Of note, the phasing out of gas subsidies by the Pérez government — a popular social program that artificially kept gas prices low for the impoverished sectors of Venezuelan society — was used by the AD to channel discontent among the general populace.

Enter Hugo Chávez

Countless individuals would then take to the streets and protest the so-called “austerity” policies of the Pérez government. This eventually led to the infamous “Caracazo” incident in 1989, where the capital city of Caracas was engulfed in a series of protests, lootings, and riots. The government responded in a heavy-handed manner, leaving hundreds dead.

In the midst of the political chaos, radical groups took advantage of Venezuela’s political turmoil to advance their agenda. One of the most famous was then Lieutenant Colonel Hugo Chávez´s group, Revolutionary Bolivarian Movement-200 (MBR-200).

Chávez took advantage of the political disarray by consolidating an anti-government movement within the ranks of the Venezuelan military. This culminated in the failed coup attempts of 1992.

Even though Chávez was imprisoned for his coup attempt, Chavez’s agitation was enough to put the whole bipartisan Punto Fijo model into question. Eventually, corruption scandals and rising degrees of social unrest would whittle away at the Pérez administration’s legitimacy. The final nail in the coffin came when Pérez was impeached for corruption charges in 1992, thus putting the Punto Fjio model on the ropes.

Collapse of the Punto Fijo Model

Two coup attempts and the impeachment of Carl Andrés Pérez, marked the beginning of a tumultuous 1990s for Venezuela. The Venezuela of the 50s to 70s — characterized by its unprecedented economic prosperity and political stability — was starting to become a distant memory.

By 1994, the Punto Fijo model was in shambles as Rafael Caldera assumed the presidency under a new coalition, Convergencia (Convergence), of disaffected political parties.

Policywise, Rafael Caldera did not rock the boat. He pursued several of the IMF’s half measures, while not addressing structural problems such as the privatization of the oil industry, Venezuela’s downward spiraling monetary policy, and big business’s cozy relationship with the state. In addition, Caldera pardoned Hugo Chávez in 1994, rehabilitating him politically.

Thanks to the failed land reforms and housing subsidization polices pursued by the two major social democrat parties (AD and COPEI) during previous decades, major metropolitan areas like Caracas, Maracaibo, Maracay, and Valencia began to be populated by a growing subsect of impoverished Venezuelans. Chávez would tap into this low stratum of Venezuelan society and effectively turn them into shock troops for his campaign to radically transform Venezuela into a full-blown socialist state.

The Failure of the Social Democratic Era

It is undeniable that Venezuela’s social democratic consensus delivered sub-optimal results. From 1958 to 1998, Venezuela’s per capita GDP growth was a paltry -0.13 % indicating that the Venezuelan populace grew faster than the wealth produced in that time frame. In his book, Introduction to Economic Growth, Charles I. Jones classified the Venezuelan case as an example of a “growth disaster.” Venezuela was one of two countries in Latin America that suffered negative growth during this 40-year period, the other being Nicaragua, a country that suffered a costly civil war and was under the rule of a socialist government.

Chávez capitalized on this stagnation by launching a campaign against the bipartisan political consensus that ruled Venezuela at the time. Branding himself as a “Third Way” candidate, Chávez sought to provide an alternative to the perceived corruption of the Punto Fijo political order.

Despite the rosy rhetoric, Chávez was surrounding himself with hardened Marxists and other collectivist figures that were hell-bent on subverting Venezuela’s already fragile political order. Little did the disillusioned voters that cast a ballot for Chávez know what they were about to get themselves into.

Chavismo: Interventionism on Steroids

While Chávez may have been correct in pointing out the corruption of the old Punto Fijo order, he would ironically continue many of its failed policies throughout his regime, amplifying their disastrous effects and implementing them in a tyrannical fashion.

Currency controls, expropriations, price controls, and the use of the state-owned oil company, PDVSA, to finance lavish social spending programs were fixtures of Hugo Chávez’s socialist economic policy.

In addition, Venezuelan political institutions were completely eviscerated, media outlets were suppressed, and political activists were subject to numerous human rights violations under Chávez’s heavy-handed rule.

Chávez had the luxury of high oil prices from 2003 to 2010 to finance his socialist schemes and channel the petroleum rents to consolidate political support in the short term. But once oil prices plummeted, the laws of economics reared their ugly head and the system began to unravel in no time.

Even with Chávez’s death in 2013, his brand of tyrannical socialism has continued unabated under the rule of his successor, Nicolás Maduro.

The Venezuela that stands before us is a failed state. In an atavistic sense, Venezuela has returned to its 19th century state as an increasingly fragmented, political backwater.

Time will tell if the Venezuelan nation will continue to exist as a cohesive whole, or if certain sectors of Venezuelan society decide to blaze their own trail and start to break up the country.

Lessons Learned

If Venezuelans want to restore Venezuela to its once prosperous state, they must look back and understand the genesis of Venezuela’s current crisis.

It is myopic to pit the blame solely on demagogues and believe that things will be perfectly fine once the “right people” are put in charge. Political events like the rise of Hugo Chávez do not occur in a vacuum. Astute observers of political economy must analyze the overarching institutions and policies that create the type of political environment that enables authoritarians like Hugo Chávez to come into power.

The Venezuelan case serves as a strong warning to many a European country with crumbling welfare states and growing social discontent. Sooner or later, unsustainable transfer systems are bound to collapse and social disorder ensues.

Left unchecked, socialism only creates a vicious cycle of interventionism that leads to more chaos and misery. To reach the light at the end of the tunnel, Venezuela must completely abandon socialism and embrace the capitalist path to prosperity.

Jose Nino is a Venezuelan-American graduate student based in Fort Collins, Colorado. He has lived in Chile, Venezuela, and the United States. He is currently an analyst with the Acton Circle of Chile. Contact: twitter or email him here.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Image source: Diariocritico de Venezuela www.flickr.com/photos/diariocriticove/
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