Wednesday, March 13, 2013

Chavez: A Paradox of Economics and History

The day after Hugo Chavez passed away I wrote this editorial for Donya e Eghtesad, the most prominent daily paper in Iran dedicated to economic affairs. It was well received, partly because like Iran Venezuela is an oil rick country and partly because Chavez was a well known figure within Iran. I was encouraged to translate it for this blog as well. Let me know if anyone is interested in printing it.

Some men remain controversial in death as in life. Hugo Chavez was one of them. The controversial president of Venezuela died, Tuesday Mar. 5, after a two year long battle with cancer. His rule lasted 14 years and was distinguishable by his anti-American stands, welfare policies, close ties with neighboring Latin American countries and his personal relationship with Cuban leader Fidel Castro. In a sense, Chavez was the last in a generation of Latin American leaders who promised a better and a more just future to masses by redistributing wealth and playing David to America’s Goliath. And yet he left Venezuelans facing empty shelves in stores across country with their national currency in free fall. His capital is notoriously known as the murder capital of the world with more than 200 murders per 100,000 individuals. Was Hugo Chavez responsible for all that gone wrong in Venezuela? That is a difficult question to answer. His policies affected Venezuelans and Venezuela’s economy in different ways.

Chavez was a rock star populist politician. His goal, like any other successful show man, was to keep his audience happy. Thus his priority was satisfying masses and not developing economic infrastructure. Venezuela’s oil rich economy had provided him with many tools to do so. He believed in a command economy. No wonder he made many of his decisions spontaneously during his live TV show “Alo, Presidente!” (Hello, Mr. President!). For him economy was a ship and he as the captain of the ship tried to bring it to where it should be by shouting orders from the bridge. Market mechanism, resource allocation, signaling and prices were not that important. He was there to find fast solutions for old problems. And he did so using the usual policy instruments: expanding the role of government and spending the oil revenues. His government constructed hundreds of housing units, battled poverty, infant mortality and expanded micro financing programs. Many Venezuelans had good reasons and motive to vote him back into office. During his first decade in office the infant mortality dropped by one third, death because of malnutrition and hunger was cut in half, thousands Venezuelans climbed the poverty line and student population of the country was doubled in size. In the same period the murder rate in Venezuela was quadrupled, inflation rate reached 18 percent and corruption became widespread. The economy paid the price of Chavez’s revolution by becoming more volatile than ever.

The truth of the matter is that Chavez did not change the economic structure of Venezuela. Venezuela’s economy has been suffering unemployment, inflation, the flight of capital, volatility and corruption for decades like many other developing countries and its neighbors. The public dissatisfaction with their economic conditions propelled this former colonel of paratroopers to presidential office. Chavez was the hero of masses because the economic challenges had marginalized them. He promised them prosperity and comfort. And he made good on his promises without treating the roots of economic instability in Venezuela.

Chavez policies ignored stabilization totally increasing the volatility by expanding the role of government and giving the president more economic power than ever. Chavez was provided with billions of dollars in discretionary funds. His policies against the capitalists prompted many educated and entrepreneur Venezuelans to leave the country. The student population was growing as the human capital was decreasing in Venezuela. At the same time seeking to become an international leader Chavez spent Venezuela’s oil revenues in public relation projects with no economic justification. He exported subsidized oil to Cuba, invested in housing projects across Latin America, bought Argentinian bonds and even sold subsidized fuel in winter time to Americans. His way of achieving a better future was cash based.

Today thousands are mourning Chavez in Venezuela. He was the symbol of all things a consumer appreciates: cheap fuel, free healthcare and inexpensive commodities. However Venezuela’s economy is in shambles and cash strapped. PetrĂ³leos de Venezuela S.A.(PDSVA) Venezuela’s public oil company still generates 94% of Venezuela’s foreign revenues. The company ability to provide the economy with hard currency is significantly reduced during last year, although oil prices were rising. PDSVA was supposed to produce 5.8 million barrels daily, however because of poor management and maintenance it only produces three million barrels per day, out of which 270,000 b/d are exported to China to pay for Venezuela’s financial obligations and 400,000 b/d are exported to Cuba. Venezuela’s power stations still rely on oil instead of natural gas and Venezuelans enjoy a highly subsidized fuel. The outcome is that most of domestic oil production is burned inside the country and PDSVA does not have much oil left to export. This has forced Bolivar, the national currency, to lose 32 percent of its value last month. Ironically Venezuelans will be fighting poverty with a diminished arsenal as a result of Chavez’s populist policies.

However, Chavez is not the last of his kind in the developing world. When slow economic growth and corruption increase the poverty, again the marginalized masses will find their Chavez promising them a just future and a fair share of their economy’s blessings. Chavez’s life demonstrates the limitations of these populist politicians and their true cost for the economy. Only oil rich countries can afford them and even these economies cannot get the lost opportunities back.