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What Revolution? The erratic economic course of Venezuela's populist president

Editorial from The Economist

Oct 7th 2004 | CARACAS - NOTHING infuriates Venezuela's mercurial president, Hugo Chavez, quite so much as the suggestion that his "revolutionary" government is nothing of the sort, but rather a re-tread of the reviled, pre-1998 governments he calls the "fourth republic". Having seen off the threat of a mid-term recall referendum in August, he has promised to press ahead with profound economic changes for the benefit of the country's poor majority. Yet, despite the fears provoked by his close friendship with Cuba's communist president, Fidel Castro, there seems to be little on offer that Venezuelans have not seen before--and to their cost.

As a young army officer, Mr Chavez staged an unsuccessful coup in 1992 against the then-president, Carlos Andres Perez. Elected in 1988, Mr Perez had promised a return to the free-spending prosperity of his first (1974-79) term of office. But the parlous state of the economy forced him into a U-turn. His IMF-inspired adjustment package immediately sparked violent riots, the repression of which cost hundreds of lives. It was the moment, Mr Chavez claims, when "the people awoke" and the revolution began.

This is largely a flight of fancy. Ten years later the people came close to electing Irene Saez, a right-wing former beauty queen, to the presidency, before opting for the left-wing and more rugged-looking Mr Chavez himself. But no less absurd is the claim that Venezuela's quarter-century-long economic and social decline is the result of "a fetishist free-market discourse", as the preamble to his economic agenda puts it. The record of the "fourth republic" was as statist as anything in the hemisphere outside Cuba.

It is hard, however, to pin down what the Chavez model consists of, or how it might differ from its predecessors. The president says it is intended to pave the way for a "concrete utopia", whatever that might be. Even he has admitted that it "still has no name or defined form". Visible elements include opposition to the United States' proposed hemispheric free-trade area, an emphasis on integration with Latin American and Caribbean neighbours and, domestically, so-called "endogenous development" protected by government subsidies.

Cuban-style socialism, however, it is not. While Mr Castro makes it spitefully difficult to set up even the smallest of micro-enterprises as a private business, his Venezuelan counterpart is cheerfully ploughing funds into the creation of as many small entrepreneurs as possible. There is also to be a network of co-operatives, along with state enterprises in "strategic" sectors of the economy. The domestic private sector, meanwhile, is assigned the role of producing and importing "non-essential" goods and services. Foreign transnationals are welcome in areas such as oil and gas, although the law gives the state the upper hand.

Flush with petrodollars (like Mr Perez in the late 1970s), Mr Chavez has already moved to set up a new airline, a telecommunications company and a TV station, all state-owned. As befits a populist, he has thrown fiscal caution to the winds. Despite paying initial lip-service to the need to counteract the debilitating oil-price cycle by saving money during the boom years, he has virtually emptied the fund set up in 1998 for that purpose. Government spending has risen by over 50% this year, and although foreign debt has been kept under control, internal debt has risen alarmingly. Unorthodox methods of raising cash, including a tax on some bank transactions and the extraction of supposed "exchange-rate earnings" from the central bank's reserves, have proliferated. Even so, income falls a long way short of expenditure.

Curiously, Mr Chavez's transitional economic programme, published in 1999 by Jorge Giordani, his planning minister and economic guru, identified most of the above as part of the problem, not the solution. Mr Giordani lambasted "the irresponsible squandering of oil revenues", "unrealistically ambitious projects", the creation of "inorganic money on a massive scale to finance public spending", and "pressure on the autonomous action" of the central bank. He also criticised the tendency for the state to switch plans even before the ink was dry--a fault to which the volatile Mr Chavez is particularly prone.

Mr Giordani, a committed central planner, makes few public statements these days. But some economists detect similarities between the Venezuelan model and previous attempts at a "third way" between capitalism and socialism, like those of China or the former Yugoslavia. And while Mr Chavez is a long way from setting up a one-party state, his opposition to liberal democracy is a matter of record. The government says that it has been introducing an improved, "participatory" version of democracy, with more consultations at the grassroots. But as one commentator dryly remarks, "the participation consists of debating the best way to comply with the instructions received."

Will the widely-predicted persistence of high oil prices over the two years before the next presidential election allow Mr Chavez to escape the electoral consequences of his own profligacy? Possibly. But Mr Perez had access to four times the oil revenue per person in the late 1970s, and his anointed successor still lost the 1978 election. The opposition candidate's jeering campaign slogan was, "Where's the money gone?".

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