March 3, 2007

The Bono del Sur Scam: Idiot-Proof Version

Quico says:
We've been hearing a lot about this "Bono del Sur" thing. Confused? Here's how it works:

Basically, the Bono del Sur is a massive give away, a great big piñata. Is it any wonder there was a mad rush to buy them up? That people demanded nine times as many bonds as were on offer?

Just like beef - and for the same reasons - these Windfall Vouchers ended up having to be rationed. Now, ask yourself this: what kind of investor was well positioned to snap them up? Boligarchs with close ties to the ruling clique? Or those on record as dissidents?

March 2, 2007

Política monetaria de a locha

Quico says: Chávez yesterday on the upcoming monetary reform:
Now, starting on January 1st, a dollar will not be worth two thousand one hundred some odd bolivars, but 2.1 bolivars, that is, we're going to strike three zeros from the bolivar, we're going to change the scale. This will bring a good number of benefits to the country. We're going to end this era of the bolivar's loss of value following Black Friday [February 18th, 1983, when the bolivar slide started,] we're going to end monetary instability in Venezuela.

We're going to see the puyita, the locha, the 12 cent coin, the locha is coming back.

We do it now because no government could've done it earlier because this
isn't something you can just decree, this is something you can do only when the country regains its economic strength, its foreign reserves, the respect Venezuela's economy has around the world, the population, GDP growth, economic growth, political stability, social strength; this will be the new bolivar, along with the new Venezuela.

OK, granted: I'll be happy to see the locha - that charming pecuniary eccentricity - in circulation again (or well, at my age, for the first time.) Though I rather doubt the new batch will read "United States of Venezuela."

The remarkable thing, though, is that as he rattles off every factor he figures matters for monetary stability, Chávez manages to miss every single relevant policy variable. Liquidity growth? Interest rates? Public spending? Central bank autonomy? Whassat?

You'd think that, just by the law of probabilities, he would've mentioned at least one of them. But no.

But never fear. Chávez is going to end monetary instability in Venezuela. No, really, he is. I mean, he said he would. He has the will to end monetary instability in Venezuela. And this is a revolution, so that's all that matters.

Wait, come again? You doubt it?


February 28, 2007

El Caracazo: The unseen military cover-up

Katy says: Yesterday was the anniversary of El Caracazo, a day that no Venezuelan can ever forget. On February 27th, 1989, thousands of poor people poured into the streets to protest a hike in the prices of gas and public transportation. As the crowds grew larger, people began looting, and pretty soon Venezuela's major cities were undergoing massive riots.

The rioting continued and grew worse through the night and onto the next day, when newly-inaugurated, democratically-elected President Carlos Andrés Pérez suspended constitutional guarantees and installed a curfew. What happened in the aftermath left a permanent stain on the country's soul.

To enforce the government's curfew, the Venezuelan military began killing people randomly in a desperate attempt to restore order in the country. Estimates say that more than 1,000 Venezuelans were killed during those days, most of them poor, many of them in their homes, while many more are missing. Numerous bodies were found in mass graves, while some were never recovered.

Yesterday we had a commemoration of sorts, with the government holding an official ceremony while at the same time vowing to end impunity. For all the grandstanding, though, the government's record in bringing those responsible to justice is dismal. The inescapable fact is that after eighteen years, not a single one of the people who murdered innocent civilians is in jail. More than a few of them have ended up, instead, in cush revolutionary jobs.

He has been in power for 8 of the eighteen years since el Caracazo. He has controlled the courts for plenty long enough to put the people responsible in jail and to implement measures to ensure abuses like this never happen again. Voices from inside and outside Venezuela, including respected human rights campaigner and victims' defender Liliana Ortega, have blasted the current administration for not doing enough to bring justice to victims' families.

Other criticism has come from an unlikely source: People's Ombudsman - and staunch Chávez supporter - Germán Mundaraín. Mr. Mundaraín came out with a report yesterday blasting the Prosecutor General's Office for not doing enough to bring about justice, only to be strongly rebuffed by Prosecutor General and former chavista Vice-President, Isaías Rodríguez. It was a rare instance of public disagreement between two men who have always worked in tandem to defend the government at all costs.

Why would a government that has made the memory of February 27th so central a part of its ideological memory fail so badly to bring those responsible to justice? The reason is that this is a military government, and the main perpetrator of the abuses during those days was the military.

President Chávez was a Lieutenant Coronel in the Venezuelan army when he tried to overthrow Pérez in February of 1992. Yet Chávez did not act alone that day: some of the officers who took part in or sympathized with the coup are now in the President's Cabinet, including the Interior, Defense and Telecommunications Ministers (Secretaries) and the head of the national tax-collecting office SENIAT. Even more are in positions of power in official chavista bureaucracy. They are now ambassadors, under-secretaries, superintendents, governors, mayors and even judges.

If all these people were active in 1992, they were also active in 1989. The fact that they remained in the military between 89 and 92 makes them immediate suspects in the 89 massacre, since they obviously did not disobey orders to shoot indiscriminately. And while certainly not all of them participated, it's safe to bet that some of them did, and they probably either hold positions of power or are connected to someone who does.

Take, for instance, the case of Crisanto Maderos. Maderos was murdered during those tragic days, a crime for which three military officers were charged: Col. Pedro Colmenares, Col. Jesus Francisco Blanco Berroterán and Maj. Carlos Miguel Yánez Figueredo. All three were active officers in 1992.

The trial ended in an acquittal, with the judge arguing that the crime had prescribed. Last July, the Chávez-appointed Supreme Tribunal upheld the acquittal. This acquittal was unrelated to a lack of forensic evidence; these guys got off on a technicality: a new low for chavista justice.

It turns out that Colmenares used to be Venezuela's military attaché in its Embassy in Washington. Colmenares has also represented the Chávez administration in the Interamerican Defense Board, and for a time was part of Chávez's personal security. Furthermore, Blanco Berroterán's brother has recently been appointed to a government post within the military justice system, having previously worked as one of the directors of the Palo Verde military jail, from which imprisoned union leader Carlos Ortega famously escaped several months ago. Yánez Figueredo, still in active service, is known for being part of the graduating class that controversially named Fidel Castro as its godfather. It doesn't take a genius to figure out the real reason these guys got out.

So while we all remember the terrible days of 1989 with sadness and thirst for justice, let's keep one thing straight: the impunity surrounding el Caracazo is not due to government foot dragging or to the usual delays of a sclerotic court system. It's the outcome of a carefully orchestrated cover-up.

An Empty Revolution

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An Empty Revolution
The Unfulfilled Promises of Hugo Chávez
By Francisco Rodríguez

From Foreign Affairs , March/April 2008

Summary: Even critics of Hugo Chávez tend to concede that he has made helping the poor his top priority. But in fact, Chávez's government has not done any more to fight poverty than past Venezuelan governments, and his much-heralded social programs have had little effect. A close look at the evidence reveals just how much Chávez's "revolution" has hurt Venezuela's economy -- and that the poor are hurting most of all.

FRANCISCO RODRÍGUEZ, Assistant Professor of Economics and Latin American Studies at Wesleyan University, was Chief Economist of the Venezuelan National Assembly from 2000 to 2004.

On December 2, when Venezuelans delivered President Hugo Chávez his first electoral defeat in nine years, most analysts were taken by surprise. According to official results, 50.7 percent of voters rejected Chávez's proposed constitutional reform, which would have expanded executive power, gotten rid of presidential term limits, and paved the way for the construction of a "socialist" economy. It was a major reversal for a president who just a year earlier had won a second six-year term with 62.8 percent of the vote, and commentators scrambled to piece together an explanation. They pointed to idiosyncratic factors, such as the birth of a new student movement and the defection of powerful groups from Chávez's coalition. But few went so far as to challenge the conventional wisdom about how Chávez has managed to stay in power for so long.

Although opinions differ on whether Chávez's rule should be characterized as authoritarian or democratic, just about everyone appears to agree that, in contrast to his predecessors, Chávez has made the welfare of the Venezuelan poor his top priority. His government, the thinking goes, has provided subsidized food to low-income families, redistributed land and wealth, and poured money from Venezuela's booming oil industry into health and education programs. It should not be surprising, then, that in a country where politics was long dominated by rich elites, he has earned the lasting support of the Venezuelan poor.

That story line may be compelling to many who are rightly outraged by Latin America's deep social and economic inequalities. Unfortunately, it is wrong. Neither official statistics nor independent estimates show any evidence that Chávez has reoriented state priorities to benefit the poor. Most health and human development indicators have shown no significant improvement beyond that which is normal in the midst of an oil boom. Indeed, some have deteriorated worryingly, and official estimates indicate that income inequality has increased. The "Chávez is good for the poor" hypothesis is inconsistent with the facts.

My skepticism of this notion began during my tenure as chief economist of the Venezuelan National Assembly. In September 2000, I left American academia to take over a research team with functions broadly similar to those of the U.S. Congressional Budget Office. I had high expectations for Chávez's government and was excited at the possibility of working in an administration that promised to focus on fighting poverty and inequality. But I quickly discovered how large the gap was between the government's rhetoric and the reality of its political priorities.

Soon after joining the National Assembly, I clashed with the administration over underfunding of the Consolidated Social Fund (known by its Spanish acronym FUS), which had been created by Chávez to coordinate the distribution of resources to antipoverty programs. The law establishing the fund included a special provision to ensure that it would benefit from rising oil revenues. But when oil revenues started to go up, the Finance Ministry ignored the provision, allocating to the fund in the 2001 budget only $295 million -- 15 percent less than the previous year and less than a third of the legally mandated $1.1 billion. When my office pointed out this inconsistency, the Finance Ministry came up with the creative accounting gimmick of rearranging the law so that programs not coordinated by the FUS would nevertheless appear to be receiving resources from it. The effect was to direct resources away from the poor even as oil profits were surging. (Hard-liners in the government, incensed by my office's criticisms, immediately called for my ouster. When the last moderates, who understood the need for an independent research team to evaluate policies, left the Chávez camp in 2004, the government finally disbanded our office.)

Chávez's political success does not stem from the achievements of his social programs or from his effectiveness at redistributing wealth. Rather, through a combination of luck and manipulation of the political system, Chávez has faced elections at times of strong economic growth, currently driven by an oil boom bigger than any since the 1970s. Like voters everywhere, Venezuelans tend to vote their pocketbooks, and until recently, this has meant voting for Chávez. But now, his mismanagement of the economy and failure to live up to his pro-poor rhetoric have finally started to catch up with him. With inflation accelerating, basic foodstuffs increasingly scarce, and pervasive chronic failures in the provision of basic public services, Venezuelans are starting to glimpse the consequences of Chávez's economic policies -- and they do not like what they see.


From the moment he reached office in 1999, Chávez presented his economic and social policies as a left-wing alternative to the so-called Washington consensus and a major departure from the free-market reforms of previous administrations. Although the differences were in fact fairly moderate at first, the pace of change accelerated significantly after the political and economic crisis of 2002-3, which saw a failed coup attempt and a two-month-long national strike. Since then, the Venezuelan economy has undergone a transformation.

The change can be broadly characterized as having four basic dimensions. First, the size of the state has increased dramatically. Government expenditures, which represented only 18.8 percent of GDP in 1999, now account for 29.4 percent of GDP, and the government has nationalized key sectors, such as electricity and telecommunications. Second, the setting of prices and wages has become highly regulated through a web of restrictions in place since 2002 ranging from rigid price and exchange controls to a ban on laying off workers. Third, there has been a significant deterioration in the security of property rights, as the government has moved to expropriate landholdings and private firms on an ad hoc basis, appealing to both political and economic motives. Fourth, the government has carried out a complete overhaul of social policy, replacing existing programs with a set of high-profile initiatives -- known as the misiones, or missions -- aimed at specific problems, such as illiteracy or poor health provision, in poor neighborhoods.

Views differ on how desirable the consequences of many of these reforms are, but a broad consensus appears to have emerged around the idea that they have at least brought about a significant redistribution of the country's wealth to its poor majority. The claim that Chávez has brought tangible benefits to the Venezuelan poor has indeed by now become commonplace, even among his critics. In a letter addressed to President George W. Bush on the eve of the 2006 Venezuelan presidential elections, Jesse Jackson, Cornel West, Dolores Huerta, and Tom Hayden wrote, "Since 1999, the citizens of Venezuela have repeatedly voted for a government that -- unlike others in the past -- would share their country's oil wealth with millions of poor Venezuelans." The Nobel laureate economist Joseph Stiglitz has noted, "Venezuelan President Hugo Chávez seems to have succeeded in bringing education and health services to the barrios of Caracas, which previously had seen little of the benefits of that country's rich endowment of oil." Even The Economist has written that "Chávez's brand of revolution has delivered some social gains."

One would expect such a consensus to be backed up by an impressive array of evidence. But in fact, there is remarkably little data supporting the claim that the Chávez administration has acted any differently from previous Venezuelan governments -- or, for that matter, from those of other developing and Latin American nations -- in redistributing the gains from economic growth to the poor. One oft-cited statistic is the decline in poverty from a peak of 54 percent at the height of the national strike in 2003 to 27.5 percent in the first half of 2007. Although this decline may appear impressive, it is also known that poverty reduction is strongly associated with economic growth and that Venezuela's per capita GDP grew by nearly 50 percent during the same time period -- thanks in great part to a tripling of oil prices. The real question is thus not whether poverty has fallen but whether the Chávez government has been particularly effective at converting this period of economic growth into poverty reduction. One way to evaluate this is by calculating the reduction in poverty for every percentage point increase in per capita income -- in economists' lingo, the income elasticity of poverty reduction. This calculation shows an average reduction of one percentage point in poverty for every percentage point in per capita GDP growth during this recovery, a ratio that compares unfavorably with those of many other developing countries, for which studies tend to put the figure at around two percentage points. Similarly, one would expect pro-poor growth to be accompanied by a marked decrease in income inequality. But according to the Venezuelan Central Bank, inequality has actually increased during the Chávez administration, with the Gini coefficient (a measure of economic inequality, with zero indicating perfect equality and one indicating perfect inequality) increasing from 0.44 to 0.48 between 2000 and 2005.

Poverty and inequality statistics, of course, tell only part of the story. There are many aspects of the well-being of the poor not captured by measures of money income, and this is where Chávez's supporters claim that the government has made the most progress -- through its misiones, which have concentrated on the direct provision of health, education, and other basic public services to poor communities. But again, official statistics show no signs of a substantial improvement in the well-being of ordinary Venezuelans, and in many cases there have been worrying deteriorations. The percentage of underweight babies, for example, increased from 8.4 percent to 9.1 percent between 1999 and 2006. During the same period, the percentage of households without access to running water rose from 7.2 percent to 9.4 percent, and the percentage of families living in dwellings with earthen ?oors multiplied almost threefold, from 2.5 percent to 6.8 percent. In Venezuela, one can see the misiones everywhere: in government posters lining the streets of Caracas, in the ubiquitous red shirts issued to program participants and worn by government supporters at Chávez rallies, in the bloated government budget allocations. The only place where one will be hard-pressed to find them is in the human development statistics.

Remarkably, given Chávez's rhetoric and reputation, official figures show no significant change in the priority given to social spending during his administration. The average share of the budget devoted to health, education, and housing under Chávez in his first eight years in office was 25.12 percent, essentially identical to the average share (25.08 percent) in the previous eight years. And it is lower today than it was in 1992, the last year in office of the "neoliberal" administration of Carlos Andrés Pérez -- the leader whom Chávez, then a lieutenant colonel in the Venezuelan army, tried to overthrow in a coup, purportedly on behalf of Venezuela's neglected poor majority.

In a number of recent studies, I have worked with colleagues to look more systematically at the results of Chávez's health and education misiones. Our findings confirm that Chávez has in fact done little for the poor. For example, his government often claims that the influx of Cuban doctors under the Barrio Adentro health program is responsible for a decline in infant mortality in Venezuela. In fact, a careful analysis of trends in infant and neonatal mortality shows that the rate of decline is not significantly different from that of the pre-Chávez period, nor from the rate of decline in other Latin American countries. Since 1999, the infant mortality rate in Venezuela has declined at an annual rate of 3.4 percent, essentially identical to the 3.3 percent rate at which it had declined during the previous nine-year period and lower than the rates of decline for the same period in Argentina (5.5 percent), Chile (5.3 percent), and Mexico (5.2 percent).

Even more disappointing are the results of the government's Robinson literacy program. On October 28, 2005, Chávez declared Venezuela "illiteracy-free territory." His national literacy campaign, he announced, had taught 1.5 million people how to read and write, and the education minister stated that residual illiteracy stood at less than 0.1 percent of the population. The achievement received considerable international recognition and was taken at face value by many specialists as well as by casual observers. A recent article in the San Francisco Chronicle, for example, reported that "illiteracy, formerly at 10 percent of the population, has been completely eliminated." Spanish President José Luis Rodríguez Zapatero and UNESCO's general director, Koïchiro Matsuura, sent the Venezuelan government public letters of congratulation for the achievement. (After Matsuura's statement, the Chávez's administration claimed that its eradication of illiteracy had been "UNESCO-verified.")

But along with Daniel Ortega of Venezuela's IESA business school, I looked at trends in illiteracy rates based on responses to the Venezuelan National Institute of Statistics' household surveys. (A full presentation of our study will appear in the October 2008 issue of the journal Economic Development and Cultural Change.) In contrast to the government's claim, we found that there were more than one million illiterate Venezuelans by the end of 2005, barely down from the 1.1 million illiterate persons recorded in the first half of 2003, before the start of the Robinson program. Even this small reduction, moreover, is accounted for by demographic trends rather than the program itself. In a battery of statistical tests, we found little evidence that the program had had any statistically distinguishable effect on Venezuelan illiteracy. We also found numerous inconsistencies in the government's story. For example, it claims to have employed 210,410 trainers in the anti-illiteracy effort (approximately two percent of the Venezuelan labor force), but there is no evidence in the public employment data that these people were ever hired or evidence in the government budget statistics that they were ever paid.


In fact, even as the conventional wisdom has taken hold outside of Venezuela, most Venezuelans, according to opinion surveys, have long been aware that Chávez's social policies are inadequate and ineffective. To be sure, Venezuelans would like the government's programs -- particularly the sale of subsidized food -- to remain in place, but that is a far cry from believing that they have reasonably addressed the nation's poverty problem. A survey taken by the Venezuelan polling firm Alfredo Keller y Asociados in September 2007 showed that only 22 percent of Venezuelans think poverty has improved under Chávez, while 50 percent think it has worsened and 27 percent think it has stayed the same.

At the same time, however, Venezuelan voters have given Chávez credit for the nation's strong economic growth. In polls, an overwhelming majority have expressed support for Chávez's stewardship of the economy and reported that their personal situation was improving. This is, of course, not surprising: with its economy buoyed by surging oil profits, Venezuela had enjoyed three consecutive years of double-digit growth by 2006.

But by late 2007, Chávez's economic model had begun to unravel. For the first time since early 2004, a majority of voters claimed that both their personal situation and the country's situation had worsened during the preceding year. Scarcities in basic foodstuffs, such as milk, black beans, and sardines, were chronic, and the difference between the official and the black-market exchange rate reached 215 percent. When the Central Bank board received its November price report indicating that monthly inflation had risen to 4.4 percent (equivalent to an annual rate of 67.7 percent), it decided to delay publication of the report until after the vote on the constitutional reform was held.

This growing economic crisis is the predictable result of the gross mismanagement of the economy by Chávez's economic team. During the past five years, the Venezuelan government has pursued strongly expansionary fiscal and economic policies, increasing real spending by 137 percent and real liquidity by 218 percent. This splurge has outstripped even the expansion in oil revenues: the Chávez administration has managed the admirable feat of running a budget deficit in the midst of an oil boom.

Such expansionary policies were appropriate during the deep recession that Venezuela faced in the aftermath of the political and economic crisis of 2002-3. But by continuing the expansion after the recession ended, the government generated an inflationary crisis. The problem has been compounded by efforts to address the resulting imbalances with an increasingly complex web of price and exchange controls coupled with routine threats of expropriation directed at producers and shopkeepers as a warning not to raise prices. Not surprisingly, the response has been a steep drop in food production and widening food scarcity.

A sensible solution to Venezuela's overexpansion would require reining in spending and the growth of the money supply. But such a solution is anathema to Chávez, who has repeatedly equated any call for spending reductions with neoliberal dogma. Instead, the government has tried to deal with inflation by expanding the supply of foreign currency to domestic firms and consumers and increasing government subsidies. The result is a highly distorted economy in which the government effectively subsidizes two-thirds of the cost of imports and foreign travel for the wealthy while the poor cannot find basic food items on store shelves. The astounding growth of imports, which have nearly tripled since 2002 (imports of such luxury items as Hummers and 15-year-old Scotch have grown even more dramatically), is now threatening to erase the nation's current account surplus.

What is most distressing is how predictable all of this was. Indeed, Cháveznomics is far from unprecedented: the gross contours of this story follow the disastrous experiences of many Latin American countries during the 1970s and 1980s. The economists Rudiger Dornbusch and Sebastian Edwards have characterized such policies as "the macroeconomics of populism." Drawing on the economic experiences of administrations as politically diverse as Juan Perón's in Argentina, Salvador Allende's in Chile, and Alan García's in Peru, they found stark similarities in economic policies and in the resulting economic evolution. Populist macroeconomics is invariably characterized by the use of expansionary fiscal and economic policies and an overvalued currency with the intention of accelerating growth and redistribution. These policies are commonly implemented in the context of a disregard for fiscal and foreign exchange constraints and are accompanied by attempts to control inflationary pressures through price and exchange controls. The result is by now well known to Latin American economists: the emergence of production bottlenecks, the accumulation of severe fiscal and balance-of-payments problems, galloping inflation, and plummeting real wages.

Chávez's behavior is typical of such populist economic experiments. The initial successes tend to embolden policymakers, who increasingly believe that they were right in dismissing the recommendations of most economists. Rational policy formulation becomes increasingly difficult, as leaders become convinced that conventional economic constraints do not apply to them. Corrective measures only start to be taken when the economy has veered out of control. But by then it is far too late.

My experience dealing with the Chávez government confirmed this pattern. In February 2002, for example, I had the opportunity of speaking with Chávez at length about the state of the Venezuelan economy. At that point, the economy had entered into a recession as a result of an unsustainable fiscal expansion carried out during Chávez's first three years in office. Moderates within the government had arranged the meeting with the hope that it would spur changes in the management of the public finances. As a colleague and I explained to Chávez, there was no way to avoid a deepening of the country's macroeconomic crisis without a credible effort to raise revenue and rationalize expenditures. The president listened with interest, taking notes and asking questions over three hours of conversation, and ended our meeting with a request that we speak with his cabinet ministers and schedule future meetings. But as we proceeded to meet with officials, the economic crisis was spilling over into the political arena, with the opposition calling for street demonstrations in response to Chávez's declining poll numbers. Soon, workers at the state oil company, PDVSA, joined the protests.

In the ensuing debate within the government over how to handle the political crisis, the old-guard leftists persuaded Chávez to take a hard line. He dismissed 17,000 workers at PDVSA and sidelined moderates within his government. When I received a call informing me that our future meetings with Chávez had been canceled, I knew that the hard-liners had gained the upper hand. Chávez's handling of the economy and the political crisis had significant costs. Chávez deftly used the mistakes of the opposition (calling for a national strike and attempting a coup) to deflect blame for the recession. But in fact, real GDP contracted by 4.4 percent and the currency had lost more than 40 percent of its value in the first quarter of 2002, before the start of the first PDVSA strike on April 9. As early as January of that year, the Central Bank had already lost more than $7 billion in a futile attempt to defend the currency. In other words, the economic crisis had started well before the political crisis -- a fact that would be forgotten in the aftermath of the political tumult that followed.

The government's response to the crisis has had further consequences for the Venezuelan economy. The takeover of PDVSA by Chávez loyalists and the subordination of the firm's decisions to the government's political imperatives have resulted in a dramatic decline in Venezuela's oil-production capacity. Production has been steadily declining since the government consolidated its control of the industry in late 2004. According to OPEC statistics, Venezuela currently produces only three-quarters of its quota of 3.3 million barrels a day. Chávez's government has thus not only squandered Venezuela's largest oil boom since the 1970s; it has also killed the goose that lays the golden egg. Despite rising oil prices, PDVSA is increasingly strained by the combination of rising production costs, caused by the loss of technical capacity and the demands of a growing web of political patronage, and the need to finance numerous projects for the rest of the region, ranging from the rebuilding of Cuban refineries to the provision of cheap fuel to Sandinista-controlled mayoralties in Nicaragua. As a result, the capacity of oil revenues to ease the government's fiscal constraints is becoming more and more limited.


Simón Bolívar, Venezuela's independence leader and Chávez's hero, once said that in order to evaluate revolutions and revolutionaries, one needs to observe them close up but judge them at a distance. Having had the opportunity to do both with Chávez, I have seen to what extent he has failed to live up to his own promises and Venezuelans' expectations. Now, voters are making the same realization -- a realization that will ultimately lead to Chávez's demise. The problems of ensuring a peaceful political transition will be compounded by the fact that over the past nine years Venezuela has become an increasingly violent society. This violence is not only reflected in skyrocketing crime rates; it also affects the way Venezuelans resolve their political conflicts. Whether Chávez is responsible for this or not is beside the point. What is vital is for Venezuelans to find a way to prevent the coming economic crisis from igniting violent political conflict. As Chávez's popularity begins to wane, the opposition will feel increasingly emboldened to take up initiatives to weaken Chávez's movement. The government may become increasingly authoritarian as it starts to understand the very high costs it will pay if it loses power. Unless a framework is forged through which the government and the opposition can reach a settlement, there is a significant risk that one or both sides will resort to force.

Looking back, one persistent question (in itself worthy of a potentially fascinating study in international political economy) will be how the Venezuelan government has been able to convince so many people of the success of its antipoverty efforts despite the complete absence of real evidence of their effectiveness. When such a study is written, it is likely that the Chávez administration's strategy of actively lobbying foreign governments and launching a high-profile public relations campaign -- spearheaded by the Washington-based Venezuela Information Office -- will be found to have played a vital role. The generous disbursement of loans to cash-strapped Latin American and Caribbean nations, the sale of cheap oil and heating gas to support political allies in the developed and developing worlds, and the covert use of political contributions to buy the loyalty of politicians in neighboring countries must surely form part of the explanation as well.

But perhaps an even more important reason for this success is the willingness of intellectuals and politicians in developed countries to buy into a story according to which the dilemmas of Latin American development are explained by the exploitation of the poor masses by wealthy privileged elites. The story of Chávez as a social revolutionary finally redressing the injustices created by centuries of oppression fits nicely into traditional stereotypes of the region, reinforcing the view that Latin American underdevelopment is due to the vices of its predatory governing classes. Once one adopts this view, it is easy to forget about fashioning policy initiatives that could actually help Latin America grow, such as ending the agricultural subsidies that depress the prices of the region's exports or significantly increasing the economic aid given to countries undertaking serious efforts to combat poverty.

The American journalist Sydney Harris once wrote that "we believe what we want to believe, what we like to believe, what suits our prejudices and fuels our passions." The idea that Latin American governments are controlled by economic elites may have been true in the nineteenth century, but is wildly at odds with reality in a world in which every Latin American country except Cuba has regular elections with large levels of popular participation. Much like governments everywhere, Latin American governments try to balance the desire for wealth redistribution with the need to generate incentives for economic growth, the realities of limited effective state power, and the uncertainties regarding the effectiveness of specific policy initiatives. Ignoring these truths is not only anachronistic and misguided; it also thwarts the design of sensible foreign policies aimed at helping the region's leaders formulate and implement strategies for achieving sustainable and equitable development.

It would be foolhardy to claim that what Latin America must do to lift its population out of poverty is obvious. If there is a lesson to be learned from other countries' experiences, it is that successful development strategies are diverse and that what works in one place may not work elsewhere. Nonetheless, recent experiences in countries such as Brazil and Mexico, where programs skillfully designed to target the weakest groups in society have had a significant effect on their well-being, show that effective solutions are within the reach of pragmatic policymakers willing to implement them. It is the tenacity of these realists -- rather than the audacity of the idealists -- that holds the greatest promise for alleviating the plight of Latin America's poor.

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February 26, 2007

The red submarines

Katy says: Chilean newspaper El Mercurio reprinted a story today originally broken by Argentine daily Clarín: Chávez is in the market to buy nine new submarines for the Venezuelan Navy, with expected costs in the billions of dollars. The main reason, according to Chávez aide Alberto Müller, is that Venezuela is concerned about a possible U.S. invasion.

This would make Venezuela the proud owner of the largest submarine fleet in the continent, with more subs (11) than Brazil (5), Colombia (4), Chile (4), Argentina (3) or Ecuador (2). Look for this to raise eyebrows in the hemisphere's diplomatic circles. In the meantime, we can only hope people in Venezuela begin to wake up and wonder why a President spends billions of dollars on sophisticated weaponry that will fail to defend us in a war he seems bent on leading us to, while millions are in desperate need for a job, a home or an education.

Other recent newsworthy developments deserve some attention:

EU breaks myth of opposition media: The EU delivered its report on the December Presidential Elections. While pointing out that the process on election day worked within international norms, it highlighted the gross imbalance in media coverage, blasting the CNE for not doing enough to prevent the use of government funds to advertise the Chavez campaign and criticizing excessive media bias in favor of the President. Shamefully, the CNE has a rosy press release on the Report but does not have a link to the document itself - get it here directly from Súmate's web page.

I was glad to see the EU debunking something Chávez apologists kept parroting the days before the election: that using government funds to advertise Chavez was OK because Rosales was doing it too. The EU determined that while institutional messages were biased either toward Chavez or Rosales, the ratio in favor of Chavez was 19 to 1, finding that 95% of all institutional advertising was deemed favorable to Chavez (p. 32).

The EU also said that state-owned channel VTV gave Chávez 86% of its time slotted to political information, with almost 80% of that information shedding a positive light on the President. Meanwhile, VTV gave opposition candidate Manuel Rosales a 14% coverage, and 70% of that coverage was negative, all at taxpayer expense (p. 33). Globovisión was found to be equally biased, something we have criticized on this blog before, although the proportion of Rosales-to-Chávez coverage was smaller than the Chávez-Rosales ratio in VTV and not as negative toward Chavez as VTV was toward Rosales.

Finally, the EU also noted that Televén and Venevisión - two private channels that are not yet on the government's list of things to take over - were unbiased but heavily slanted toward the government (p. 34). So much for the urban legend of Venezuela's media being anti-Chávez. As for the written media, the EU curiously finds that the most biased newspaper in Venezuela is Diario Vea, which relies heavily on government subsidies and advertising and is headed by well-known chavista figureheads (p. 36).

The document is a good read, for those who have the time.

Mickey Mouse money: The Central Bank reported Bs.26.9 trillion in earnings last year, about US$12 billion at the official exchange rate. One wonders where these earnings are coming from since the exchange rate has been fixed for more than a year, but leave it to creative chavistas accountants to come up with the numbers. When the Central Bank meets Chávez's demands for $8.7 billion of its assets to be transferred to him, it will have transferred a whopping $19 billion to Chávez since the beginning of 2006.

It is clear the Central Bank is financing the government with the currency reserves that back the bolívars in Venezuelan's pockets. If the price of oil were to fall moderately, the bolívar (or whatever it is called by then) will lose value quickly. Inflation will shoot up and a recession will be upon us. We've seen this movie played a million times, and it will happen again.

Bean counters on crack: As if to highlight the insanity of public finances, Venezuela's tax-collector warned that tax receipts will be Bs.12.8 trillion (US$6 billion) lower this year than last, thanks to the President's rash and messy VAT tax cut. While this is playing out, we get the news that state oil giant PDVSA will borrow $8 billion this year.

One has to wonder why an oil company has to go around borrowing such an insane amount of money when oil prices are still pretty high and while the government is cutting taxes, but that's Chavenomics for you. PDVSA President Ramírez is also on the record urging, almost begging, OPEC to lower current production quotas by at least 500.000 barrels per day, revealing a not-so-subtle fear that a further drop in oil prices could really hurt the Revolution.

That's mine too: In a rare press conference, Chávez announced that he is ready to pass a law controlling the prices of housing and private schools. Since the President recently passed a controversial law saying that the government can take over, at any point in time and without a court order, any industry that is submitted to price controls, this is an ominous sign since it would give the government the legal authority to take over private schools or private housing at will.

Anyone investing in housing and not paying off the government has to be insane - as is anyone thinking there is no chance private schools will be taken over. None of this is surprising - after all, Cubans don't go to private schools, nor do they own the homes they live in.

The tenientico's psychotic rants: In the same press conference, the President also blasted a reporter from Brazil's O Globo (see Daniel's excellent blow-by-blow account here) and hinted that private property should be "supressed" and "eliminated" if it goes against society. Chávez did not clarify.

Finally, Chávez said that people raising cattle or selling processed beef should forget about making money because, as he sees it, the most important thing is for the people to eat beef. Recent draconian price control measures have basically wiped out legitimate profits in the meat-producing business, so expect to see a collapse in the country's beef production in the coming months.

Note: Cartoon by Gavin Coates, courtesy of

A response from Alek Boyd re: Primero Justicia

Katy says: Fellow blogger Alek Boyd had a different take on Primero Justicia's split than the one I expressed. I don't have an agenda on this issue, and people should be informed of all views, so I asked Alek if it was OK to publish his private response, and he agreed. Here's what he had to say:

"Well Katy, I have great respect for you, but I think your piece does not do justice to the facts. Before saying anything else let me absolutely clear about one thing: Leopoldo López wins elections, Julio Borges does not. Weeks before the split, I was in Venezuela, as you know. I met with Leo on a couple of occasions whilst there, and I said "voy a menear la mata en PJ" and I think that to some extent I did.

I did not advise López to take the route to public confrontation and shows on the media for, as you rightly pointed out, it would dampen the party's image. Having
said that, and after three months of traveling around the country, I can only but disagree with your take on Borges' alleged popular support. That's just bull, on the basis of his appeal whenever he presented himself nationwide and his electoral track record. I advised Leo to discuss with Julio the party leadership, in private, and the angle I thought most appropriate was the possibility to bring Julio's lack of want to accommodate his demands to international party donors and social Christian partners in Europe, task for which I put my name forth as a spokesman of sorts.

I also told him that the first step in the road to gaining power in Venezuela is to get rid of what's useless, and that applies to Julio, most of his claque and other figures that hadn't been allowed to register in the party as Ojeda and Smith, that Leo wanted at his side. He replied with an argument that seemed fair enough to me by saying that very few people were willing to become involved in politics and that one of the strongest bones of contention with Julio was precisely this business of having a committee approving new memberships, as any elitist organization would do. He agreed that what's useless had to be left behind but countered by saying that the situation was such that even the useless are important. Another chap that was present in the second meeting -very high in the Rosales campaign team with nationwide responsibilities- advised to take on Julio fully in the media. It is obvious that such was the road chosen.

I have to again disagree with you on the use of respecting rigid party bylaws, considering that this is Venezuela we're talking about. As said earlier Julio is not a charismatic leader, he has never won an election and his presence is not widely welcomed by regional party leaders. I saw that myself for I had the chance to speak to many of them. Fearing a defeat should Leo's conditions had come to bear he simply refused to accept them, which by the way were nothing new as laid out in my interview more than a month before the election, and not as you have suggested that it's a result of the party's success in Dec 3. In fact, these petitions were introduced more than a year before, as you know.

Katy, Venezuela is the land of the caudillo, that part neither of us will change. Where we can have an impact is in the propping up of the caudillo with the best chances at amassing political and popular power. Leo's reply to my question "¿donde estan tus delfines?" shocked me; as a progressive, foreign-educated and promising politico I would have thought he had thought about "la generación de relevo." I said to him that he stood no chance of ridding himself of the legal accounts that pend on him and that, for that reason, he had to start a larger movement with a popular base where all the conditions he wanted imposed in PJ could be put in practice, therefore only the best natural leaders could move up the ranks. I also told him that his political future depended on his ability to gain the leadership of the third party of the country.

He looked at me sort of perplexed maybe thinking "I just wasn't thinking so far ahead in time." As any other caudillo he has surrounded himself with lesser caudillos, not necessarily with the most brilliant disciples, but then again the same could be said of all the others. However I do think that he has a better chance at shaping the future of our country; he's not ideal -who is?- he's just the best of the lot.

To conclude, to cast doubts on his charisma based on votes cast in favour of Rosales as announced by the CNE: come on Katy, you could do much better than that...In my opinion pragmatism is key and will be even more in the future. Party rules in times of war? Give me a break."

As I told Alek via email, my experience has been that it's pretty easy to register people in Primero Justicia, and I have done it in numerous times. I had no idea Ojeda and Smith wanted to enter the party, but I'd be surprised if they were serious about it since Ojeda chose to enter Un Nuevo Tiempo instead and Smith has not formally joined another party, as far as I know. As for Borges not winning elections, that is factually incorrect: Borges was elected and served a term in the National Assembly.

It's also fair to remind voters that, while some people may think Leopoldo López wins elections but Julio Borges does not, at least Julio Borges is legally allowed to run, while Leopoldo is not, an issue that is not irrelevant in this feud.