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Searching for Gorbachev in Caracas

Thursday, April 5, 2012

The Bolivarian Revolution risks breaking to pieces. With each passing day, Caracas more closely resembles Moscow circa 1991.

When the going gets tough, the tough apply the thinnest veneers of window dressing—or so one would assume of Hugo Chavez, the Venezuelan strongman running for his third six-year presidential term this October.

Venezuela has led the world in inflation for every year since 2007, thanks to the expansionary fiscal policy of his “Bolivarian Revolution,” with consumer price index growth topping 26 percent in January 2012. Last year CPI growth outpaced that of wages by 40 percent, leaving people unable to afford basic goods. Chavez reacted as any good economist, and effectively “banned inflation.” When his Fair Prices and Costs Law took effect in November 2011, the government acquired authority to pre-approve all retail prices in the country. Predictably, this has created shortages of food and other consumer staples, as producers and retailers have no incentive to bring products to market that they cannot profitably sell. The Bolivarian Revolution risks breaking to pieces. With each passing day, Caracas more closely resembles Moscow circa 1991.

Countless political economists have argued and opined on what caused the Soviet Union to fail, but if there is one point on which all agree, it is that severe economic dislocation suffered during perestroika was the last straw.

Countless political economists have argued and opined on what caused the Soviet Union to fail, but if there is one point on which all agree, it is that severe economic dislocation suffered during perestroika was the last straw. While the inflationary impact was comparable to that seen in Venezuela, the causes were very different. Consumer shortages abounded because the loosening of market restrictions coincided with two untimely shifts in global commodity prices: a 50 percent drop in the price of oil, the USSR’s prime export, between 1980 and 1989, and a 56 percent rise in grain prices, the nation’s leading import, between 1987 and 1989. Gorbachev responded by borrowing heavily from Western banks, which tripled foreign debt and ruined the country’s credit rating. Liberation of the satellite countries meant that East Germany, Poland, and Czechoslovakia were no longer forced to engage in trade relationships that were skewed to advantage Moscow. While Gorbachev’s intentions behind perestroika were sound, supply chains and information flow in the nascent market economy were simply not mature enough to absorb so much simultaneous turmoil.

Certainly not all instances of hyperinflation result in popular unrest or the toppling of leadership. But for Caracas, as it did for Moscow, economic collapse may well represent the tipping point. Like Soviet leaders before him, Chavez has used illusions of socialist utopia to submit his people to statist and anti-market policies that have brought about economic ruin. There is only so much misery that people who have sacrificed their economic freedom for a supposed “greater good” are willing to take.

When Chavez nationalized the utilities, and then set rate caps in 2002, he diminished funds available for utility investment, while artificially raising electricity demand. He also stacked the utility companies with political cronies lacking appropriate technical competence. As a result, despite having some of the world’s largest oil and natural gas reserves, Venezuela has suffered through sporadic, crippling power shortages and blackouts since 2009.

Foreign direct investment stood at $3.7 billion in 2001, but has been in free fall ever since. FDI was negative $3.1 billion in 2011.

Chavez has all but scared away foreign investors. Foreign direct investment stood at $3.7 billion in 2001, but has been in free fall ever since. FDI was negative $3.1 billion in 2011, as a result of a continuous string of nationalizations that has seen foreign assets in the energy, manufacturing, agribusiness, steel, construction, and banking sectors appropriated by the state. This has occurred in a year when FDI in Latin America jumped 40 percent to $112 billion, including $22 billion in Mexico, $14 billion in Chile, and $10 billion in neighboring Colombia. Even Chavez’s mentor, Fidel Castro, managed $86 million in FDI for Cuba.

Venezuela’s productive capacity has suffered deeply from the lack of foreign investment, with the non-oil sectors particularly hard hit. The country must now import consumer goods that had previously been produced domestically, causing public debt to climb from 25 percent to 33 percent of GDP in 2011 alone. By devaluing the bolivar by 65 percent against the U.S. dollar in 2010, in order to increase the spending power of dollar-denominated oil revenues, Chavez reduced the value of the Venezuelan people’s hard-earned savings by that same amount.

And, due to its dealings with Iran, the state-run oil company PDVSA (Venezuela’s biggest exporter) has drawn sanctions from the U.S. government. The loss of business from its biggest customer will interrupt that country’s steadiest source of foreign exchange, and will make additional near-term debt increases and inflation all but inevitable.

To Gorbachev’s credit, he foresaw the doomsday scenario. He realized that the USSR’s only path forward as a socialist state was to abandon many of its unaffordable diplomatic and military commitments, freeing resources to save the economy. Reducing the superpower’s footprint earned Gorbachev great scorn and derision from Soviets, but it demonstrated a rare mix of humility and bravery that is uncommon in most world leaders. Unfortunately for him, it was too late. Gorbachev had lost support from a military demoralized by extensive budget cuts and the unilateral “surrender” of the Eastern Bloc countries to their own self-determination. An inept coup followed, and the military threw its allegiance to the ascendant Boris Yeltsin. The Soviet Union collapsed, a superpower dismantled.

Memories of Moscow in 1991, or post-election riots of 2009 Tehran, or even a series of anti-Chavez riots in 2004 and 2010, have prompted him to shore up support with the military in advance of October’s polls.

Chavez has reacted to his dire reality by stubbornly adhering to socialist “reforms,” reinforcing the wall around his inner sanctum, and shoring up support with the military in advance of October’s polls. Chavez has culled opponents and stacked the ranks with allies, most recently anointing General Henry Rangel Silva as defense minister in January. Silva famously declared in a 2010 interview that the military was “married to the political socialist project,” and that a government contrary to Chavez would be “unacceptable.” Silva’s resume also includes, according to the U.S. Treasury, material support for Colombia’s FARC rebel group and ties to regional drug traffickers.

If Chavez believes his military support protects him from popular revolt, he should consult Hosni Mubarak. Not only was the Egyptian president a military man himself—a national hero from the 1973 war with Israel—but he had tens of billions of dollars in unconditional American aid with which to buy the loyalty and morale of his armed forces. That all ceased to matter in February 2011, when the military acknowledged a historic tidal shift, refused to fire on civilians, and facilitated Mubarak’s resignation. Given that the extreme alternative is illustrated by Syria’s shooting and bombing its people into submission, one would hope that in the event of a major anti-Chavez uprising, Caracas’s historic democratic tradition would help the Venezuelan military’s better senses to prevail.

Whether it ends in the ballot box, by violent revolution, or by Chavez’s succumbing to the cancer he has suffered over the last year, the Bolivarian Revolution will crumble. Chavez has wrought astonishing devastation on his country, in the name of a futile ideology that history condemned in 1991. The Soviet experiment ended bloodlessly, only because it had a ruler who could see past his own ambitions. If only the Venezuelan people can be so lucky.

Jay Hallen has advised financial institutions in the Middle East and Russia, and currently consults banks for a major New York firm.

FURTHER READING: Jay Hallen has also written "Libyans Need Economic Freedom." Ambassador Richard S. Williamson adds "Chávez Has Begun to Take the Path of Dictatorship." Roger F. Noriega adds "The Toxic Transition in Venezuela" and "Sinister Forces at Work in Venezuela Power Struggle." 

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