July 8, 2007

The politics of fiscal retrenchment

Quico says: So, Finance Minister Rodrigo Cabezas finally figured out that if you prime the pump long enough, the thing just breaks. In a rare outbreak of economic common sense, he announced that the government plans to fight inflation by slowing public spending and mopping up $2.8 billion worth of liquidity. Even then, he knows he won't be able to bring inflation in at its 12% target, but hopes for 14%.

All that talk of fiscal discipline sounded possitively Friedmanesque. It was weird.

But the questions won't take long to crop up. What's going to happen on the next Aló, Presidente when Chávez has a marvelous new idea, turns to his money guy and says, "Rodrigo, be sure to set aside $450 million for this one"? Can we seriously picture him shooting back, "I'd like to, presidente, but remember, fiscal discipline!" ? And even if he did, could he also control PDVSA's autonomous spending? How about Fonden's? When Carlos Lanz calls Chávez and tells him ALCASA needs an emergency cash injection to continue operations, is Chávez going to let that veritable worker's paradise collapse just because Cabezas wants to shave half a point off the inflation number?

There are two interlocking problems here: the longstanding impossibility for any minister to make a credible commitment on Chávez's behalf, and the increasing fragmentation of the institutional mechanisms for exercising fiscal policy, which now include at least three parallel state budgets - PDVSA's, Fonden's and the normal budget - with no meaningful oversight over any of them.

Of course, it could be that Cabezas' announcement is driven more by income shortfalls than by a newfound commitment to fiscal discipline. Oil prices may not have fallen much, but oil production continues to tick down, and the operational problems in PDVSA have only grown over the last few years. So the revenue stream may be flattening out, but the expectation of continually improving standards of living financed by continually increasing state spending certainly hasn't.

Fiscal retrenchment is good policy but bad politics here: Chávez's performance legitimacy now rests on the state's ability to continually improve people's standards of living. His ideological legitimacy does as well, since he's emphasized so much that the private sector can't make everyone better off. So if the state can't deliver on people's economic aspirations, Chávez will face mounting social unrest: not, this time, from the opposition, but from his one-time supporters, whose expectations he won't be able to meet.

So far, under Chávez, poor people's incomes have risen faster than inflation, all on the back of extraordinarily fast growing oil revenues. But Cabezas' announcement is an implicit acknowledgement that that era is coming to an end. Public spending has now reached the point where it feeds directly into price rises rather than into increased aggregate demand. Cabezas, at least, seems to grasp that even if oil revenue did continue to rise, there would be little point in continuing to feed inflation by jacking up spending (but does Chávez?)

The exhaustion of the keynesian phase of chavista economic management will profoundly transform the politics of the Chávez era. Because there is a long, established tradition of social protest in Venezuela: and unrest always intensifies when the state runs short of the funds it needs to bankroll the needs of society. It's a cycle we've seen played out many times before.

How is Chávez going to deal with it? Is he going to call the protesters CIA stooges and throw them in jail? Or is he going to lecture them on the true socialist's stoic contempt for consumption - that lefty equivalent of the old right-wing paeans about the moral virtue of austerity?

And what will a fiscal retrenchment mean for people's perceptions of the new Hummered Elite? Things could get really tricky for chavismo on this score. Venezuelans' attitudes towards corruption have always tracked the oil cycle. People didn't much begrudge the AD elite's graft in the 70s because there was more than enough bread to go around back then, but they ressented corruption acutely in the 90s, when the lifestyles of the well-connected contrasted so starkly with their own.

For similar reasons, Chávez hasn't really paid a political price for his cronies' corruption on the up-side of the current oil cycle, but that luck is not likely to stay with him on the down-side. The revolution seems to be condenscing a process of popular disenchantment that took AD 30 years to accomplish in just a decade: a three-fold increase in efficiency!

Marcos the Apure Fisherman knows all about this sort of thing. As we enter the new era of chavista fiscal retrenchment, let us make, 2, 3, many Marcos the Fishermen!