Venezuela’s Sea of Unhappiness

Venezuelan President Hugo Chavez has survived a recall referendum and may well serve out the remainder of his term. Global oil prices dropped a bit on the prospect of stability. So all’s well in Venezuela?

“Venezuela…is heading in the same direction, toward the same sea to which the Cuban people are heading: a sea of happiness.” – Venezuelan President Hugo Chavez.

There was a time when one reasonably might have expected never again to hear Cuba, with its authoritarian politics and dysfunctional economy, invoked as a model for anything. But Chavez is not as lunatic as he sounds. There is a logic to his rhetoric, a logic dictated by politics. And it bodes ill for Venezuela.

Chavez’s politics are above all the politics of charismatic populism. They are the politics of popular protest – the only kind of politics that worked in 1990s Venezuela. Chavez’s problem was something called the “Punto Fijo system.” This system was born in 1958, in the town of Punto Fijo, when Venezuela’s two leading political parties inked an agreement to share power no matter what the results of the 1959 election.

It started as a compromise to stave off civil war; but it fostered unhealthy collusion. The two parties, always sharing power, grew fat on decades of uncontested control of state spending. By the early 1990s, the Punto Fijo patronage network was so vast that more Venezuelan towns had party branch offices than had Catholic churches. The only political candidates with any chance of success were Punto Fijo candidates.

Chavez changed that. He found the beast’s soft underbelly. To defeat the professional politicians, propel the masses into politics. This he did with fiery rhetoric. “So much riches—the largest petroleum reserves in the world, the fifth-largest reserves of gas…and 80 percent of our people live in poverty. What scientist can explain this?” Chavez claimed that Venezuela’s great wealth had disappeared into the pockets of the country’s “political class.”

And the people believed him, to an astonishing degree. Opinion polls found 91 percent of Venezuelans agreeing that corruption was the only factor preventing all Venezuelans from living “very well.” A full 78 percent of respondents believed that Venezuela was “one of the richest nations in the world.”

Chavez had identified the source of Venezuela’s problems. And the solution: topple Punto Fijo. In the 1998 presidential election, hitherto passive Venezuelans made themselves heard. Voter turnout leapt from the 30 percent average to a staggering 95 percent. Chavez won a landslide victory. And then, with roaring supporters in the streets, he dissolved the legislature and imposed a new constitution via referendum.

But Chavez had a problem. What he had said was not true. Venezuela was not, in fact, rich. Truly oil-rich states such as the United Arab Emirates and Kuwait have per-capita oil revenues in excess of $9,000 per annum. Venezuela’s hover around $330.

Scholar Kurt Weyland wrote a perceptive article in 2001 arguing that unlike relatively successful Latin populists such as Alberto Fujimori in Peru and Carlos Menem in Argentina, Chavez was headed for a quick demise. The problems of both Argentina and Peru – hyperinflation in both cases and, in Peru, unchecked guerillas – were amenable to dramatic remedies. Fujimori and Menem took bold steps producing quick results and cemented their popularity. But Venezuela’s problems – entrenched poverty borne of economic failure – would take decades, not months, to fix.

To be sure, Chavez had to some extent fingered the right villain. The Punto Fijo system nurtured a public sector that was a political patronage mechanism, not a functioning civil service, and class of business “oligarchs” with excessive political influence. (Like the oligarchs in Russia, they controlled much of the media and abused this to political ends.) The pernicious influence of these entrenched interest groups indeed helped keep Venezuelans poor.

In fact it is astonishing just how poorly Venezuela ranks in the annual economic competitiveness surveys produced by the WEF and IMD. With its dysfunctional civil service, Venezuela ranks either worst or second-worst of all rated countries on (1) the competence of public officials, (2) the frequency of bribes, (3) the degree of judicial independence, (4) the quality of the legal framework, (5) political interference in the civil service, (6) protection of private property and (7) the basic ease of doing business. Which is to say, on these measures, rated as bad or worse than countries including Bangladesh, Nigeria, Vietnam, Ukraine and Haiti.

But such profound institutional problems are not amenable to quick, dramatic improvements. Or so Weyland argued in his 2001 article.

But Weyland had overlooked one important ideology – one so discredited it had fallen off the map in most of the world – Cuban socialism. And this offered quick and dramatic solutions – to at least the symptoms, if not the cause, of Venezuelan poverty. If wealth could not be created, at least it could be redistributed.

And so when, as Weyland had forecast, Chavez’s popularity plummeted – to under 30 percent by 2002 – Chavez did not give up. Rather, he tightened his improbable embrace of Castronomics. He handed out oil money to the poor via social programs. And – in exchange for the oil to feed his dying economy – Castro sent an army of doctors to man public clinics in the Venezuelan slums.

These were the bold strokes Chavez needed. His popularity rebounded. This month, he survived a recall referendum he had once looked sure to lose.

To be sure, Chavez probably has no intention of implementing full-on Cuban socialism. He seems in no hurry to destroy his country’s economy. Most economic instability thus far has been the result of Chavez’s running battle with Venezuela’s elites. Strikes that shut down the oil industry, exchange controls designed to punish businesses sympathetic to the opposition. With these fights winding down, the economy has, for now, rebounded.

But the problem is Chavez’s political logic. Robert Mugabe in Zimbabwe likely never planned the rapid forced redistribution of white-owned farms that has caused his country’s economic collapse. But he had talked about it so much that – his back against the wall – he was eventually forced into it.

And that is the dire fate that may well await Chavez. Communism is a card that, once played, does not go back in the deck easily. The more dramatic results Chavez is called upon to deliver, the greater the cost to the economy. (And then, the greater the clamor for more results.) Venezuela may indeed be heading in Cuba’s direction, whether the captain knows it or not – and in that direction, “a sea of happiness” is not what awaits.

This article was originally published on Countryrisk.com, before I sold the website to Roubini Global Economics.