hugo chavez against the backdrop of venezuelan political and economic history
TRANSCRIPT
8/7/2019 HUgo Chavez against the backdrop of Venezuelan Political and Economic History
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Hugo Chavez against the Backdrop of Venezuelan Economic and Political History
Hugo J. Faria
Instituto de Estudios Superiores de Administración and Universidad Monteavila
Address in the U.S.
IESA POBA International 646
PO Box 02-5255
Miami FL 33102-5255
Address in Venezuela:
IESA, Centro de Finanzas
Calle IESA, San Bernardino
Caracas, Venezuela
Telephone #
58 212 555 4327 (Office)
58 416 6244019 (Mobile)
58 212 992 6103 (Home)
This is a revised version of the paper “From Riches to Rags: A Venezuelan Tale of Ethical Decay that Explains Hugo Chavez” presented at the 2007 APEE Conference.
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Political Economy Determinants of Hugo Chavez
President of Venezuela Hugo Chavez is a source of irritation for the leaders of free
countries. Financed by high oil prices Mr. Chavez has meddled in the internal electoral
processes, sometimes successfully, of Bolivia, Ecuador, El Salvador, Mexico and Peru
among others. He has established alliances with Iran and other rogue states of the Middle
East. “An avowed Marxist, Mr. Chávez is in the process of destroying his country. Of
this there is no doubt. But he is also an international menace, and a rich one at that. He
has been using his oil wealth to sow revolution, à la Fidel Castro, in South and Central
America. Did we mention that he's a dear friend of the Iranian government?” (O’Grady
2007).
In short, Chavez has been a destabilizing force around the world attempting to subvert
democratic rule and capitalism and to instate the so-called Socialism of the XXI Century
in Venezuela and elsewhere. In Venezuela, the so-called Bolivarian Revolution in 2007
has nationalized utility companies in the electric sector, renationalized the largest fixed
telephone company and shut down a TV station with the broadest audience.
The aim of this paper is to cast light on the political economy determinants behind the
advent and popularity of Hugo Chavez. This research shows that the Venezuelan
economy was a growth miracle from 1920 to 1957 in particular during the decades of the
forties and fifties. However, starting in 1958 and with the dawn of democracy in 1959,
political leaders acting in complicity with some members of the private sector, started to
undermine the institutions that protected private property. This erosion of economic
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freedoms continued unabated and was conducive for the free election of Hugo Chavez.
Under Chavez, economic freedom has continued to decline and not surprisingly, political
and civil liberties are seriously in jeopardy. Thus the Venezuelan economy from a
growth miracle became a growth disaster. This is a story of an economy that went from
riches to rags provoked by a governmentally owned oil wealth that engendered perverse
incentives coupled with a lack of political and entrepreneurial leadership.
This paper has the following structure. The sections Growth Miracle and Growth
Disaster provide objective information on the performance of the Venezuelan economy
for the periods 1920-1957 and 1958-2006 respectively. Section What Happened? offers a
brief historical account that allows a comparison of the institutions that prevailed in both
periods, 1920-57 and 1958-2006. Based on the institutional environment evidence that
prevailed over the 1958-2006, the Poverty Trap section characterizes today’s Venezuelan
economy as socialist and mercantilist and suggests some factors that account for its time
persistence. The following section entitled Collective Action Problems brings a Public
Choice perspective of why is so difficult to extricate the Venezuelan economy, and for
that matter most Latin American economies, from the poverty trap of socialism and
mercantilism. The next section The Foundation of Freedoms highlights that property is
the foundation of freedom and patrimonial governments like Venezuela’s lack this pillar
of freedom contributing to explain the precarious political, civil and economic liberties in
Venezuela. The section Other Obstacles to Freedom, based on historical and
contemporaneous evidence suggests the importance of entrepreneurial leadership for the
promotion of economic freedom. This section also brings examples that point to the
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absence of this leadership in Venezuela. The following section Probable Scenarios offers
potential future outcomes describing causes for the demise of Chavez. The perception is
that there is more optimism about the prospects of ousting Chavez than about the
implantation of capitalism. The final section Conclusions summarizes the paper.
Growth Miracle
According to (Jones 2002, 216-219) who uses data from the Penn World Tables Mark 5.6
that updates (Summers and Heston 1991), Venezuela’s GDP per worker relative to the
U.S. in 1960 was 0.837. That is Venezuelan workers on average earned almost 84 cents
for every dollar made by average American workers. To put this indicator in perspective
in 1960 Canadian workers earned 79.7%, Swiss 82.5% and Australian 78.8% of
American workers.
To reach such a high plateau necessarily the Venezuelan economy had to grow at very
high rates during the preceding decades and the best available evidence is consistent with
this hypothesis. Official and reliable data from the Venezuelan Central Bank commenced
in 19501. According to central bank data during the 1950-57 period the Venezuelan
economy exhibited an average real per capita growth rate of 5.4% similar to the growth
rates experienced by the Asian Tigers during the 1960-2000 period. Moreover, the
accumulated growth rate of the Venezuelan economy for the 1950-57 period was 87%,
not only higher than of any Latin American country but surpassing the accumulated
growth rate of West Germany which was of 76%. Thus the German Miracle paled in
comparison to the Venezuelan Miracle.
1 The Venezuelan Central Bank was established in 1939.
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Moreover, the best available evidence provided by (Baptista 2006) and (Sanchez-Coviza
and Olcoz 1966) suggests that Venezuela’s GDP expanded during the forties at rates in
excess of 10% annually. These same scholars estimate high growth rates for the decades
of the twenties and even the thirties.
Growth Disaster
Jones (2002, 4) using data from the Penn World Table classifies Venezuela as a growth
disaster because between 1960 and 1997 real income per capita experienced a growth rate
of minus 0.13 percent. According to (Barro and Sala-i-Martin 2004, 4), out of 112
countries with known data from 1960 to the year 2000, sixteen countries endured average
negative growth rates. Fourteen out of sixteen countries belonged to the Sub-Saharan
region, two were Latin American, one, Nicaragua suffered a civil war and a socialist
government, the second one was Venezuela rich in oil, gas, carbon and iron and with no
major internal turmoil.
Using data from the World Development Indicators published by the World Bank and
based on the author’s calculation and fellow researcher’s Hugo Montesinos, Venezuela’s
growth rate of its real income per capita during the sixties averaged 1.46%, seventies
minus 0.76%, eighties minus 1.88%, nineties minus 0.08% and during the presidency,
thus far, of Hugo Chavez from 1999 to 2006 minus 0.06%. However, the growth rates
from 2004 until the present have exceeded 10% annually due to high oil prices.
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What Happened?
The discovery of oil in 1918 provided substantial impetus to the Venezuelan economy.
However, private international companies handled all aspects of the oil business. That is,
the Venezuelan government did not commit the mistake of attempting to manage the oil
business. The Central Bank acted as a Currency Board defending an irrevocable fixed
exchange rate to the dollar. The marginal tax rate on individual income was 12% in 1957
and consolidated public sector absorbed 22% of GDP. Moreover, government
consumption represented 12% of GDP and the rest was spent building the country’s basic
infrastructure. The overall fiscal budget was generally in surplus. Tariffs on imported
goods were relatively high, 20%, nonetheless other impediments to trade like quotas,
antidumping or safeguard laws did not exist. There were very few state owned
companies. Virtually no price, interest rates or exchange rate controls existed. Although
political and civil liberties were very restricted, the judicial system administered justice
impartially, particularly in the area of business and economics. The cities of the country
were safe and corruption was centralized, located at the highest level of government.
Thus, the damage of corruption to growth was not as severe when it is widespread across
governmental bureaucrats.
According to Escovar and Faria (2005) the index of economic freedom for Venezuela, on
a scale from 1 to 5 where one is the freest, was 1.5 in 1950 and 1.6 in 1955 2. This
suggests that the Venezuelan miracle was not just driven by oil. A set of economic
2 Escovar and Faria (2005) using criteria of the Heritage Foundation and the Wall Street Journal estimatedVenezuela’s economic freedom for the years of 1950, 1955, 1960 and 1965.
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institutions were in place that guarded private property and contributed to channel the oil
wealth efficiently through out. To the extent, that the manufacturing, construction and
service sectors were expanding at rates greater than overall GDP.
Even though during the fifties Venezuela enjoyed high levels of economic freedom,
several governmental decisions started to erode them. In 1950 de dictatorial government
of Perez Jimenez nationalized CANTV, the telephone company. A few years later
founded SIDOR, a state owned steel company, built dams to generate electricity and also
established various hotels across the country with the intent of developing a tourist
industry. In addition, founded a state owned petrochemical company called Instituto
Venezolano de Petroquimica and set up numerous regional “development” banks. This
tendency towards state owned companies was implicitly justified on the apparent success
of centrally planned economies like the Soviet Union.
Perez Jimenez government was overthrown in 1958 and a democracy with universal
suffrage and freedom of the press was established in 1959. These events are consistent
with the notion of economic freedom, growth and wealth destabilizing dictatorial
regimes, (Barro 1999 and Glaeser et al. 2004). That is, citizens after savoring economic
freedom also want to enjoy political and civil liberties.
Democratic leaders, however, accelerated the downfall of Venezuela towards socialism
and mercantilism. Romulo Betancourt was elected in December 1958 and assumed the
presidency in 1959. One of Betancourt’s first decisions as president was a Land Reform
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aimed against the existence of large extensions of land, latifundium. New “owners” of the
redistributed land were given titles of use but not full ownership titles. Betancourt’s
government established a central planning governmental office called CORDIPLAN
adapted to a mix economy. During his tenure OPEC, a cartel, was founded by one of his
cabinet members, an oil state owned company was created called CVP and international
oil companies were barred from new concessions. That is, if these companies discovered
new oil they were not allowed to extract it.
Betancourt devalued, (confiscated average Venezuelans labor fruits), the currency from
bolivares 3.30 to 4.50 to the dollar and implemented exchange controls. In addition, he
increased overall government expenditures, in particular consumption outlays. Tripled
income tax rates from 12% to 36% and exacerbated its complexity and gradualness
creating numerous brackets. Years of successive fiscal deficits made their first
appearance and have become a staple of Venezuela’s public finance
Price controls were generalized. A notable example was rent controls which wiped out
the rental dwelling market and contributed to foster today’s slums. Lastly, limited
European immigration, which was major source of innovation and transformation of the
Venezuelan economy.
Not withstanding the fatal wounds to the Venezuelan economy inflicted by Betancourt,
the following government of Raul Leoni cemented the import substitution policy that
ended up increasing the cost of living to Venezuelans and misallocated resources. Leoni
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also fortified and augmented the syndicated labor force. Rafael Caldera succeeded Leoni
and not only did not reverse the socialist and mercantilist policies of his predecessors, but
made the Venezuelan economy more inward looking forcing all private companies to be
owned in its majority by Venezuelans.
In 1974 Carlos Andres Perez was elected president of Venezuela. His government like
Betancourt’s provided a big push to socialism. The central bank, founded in 1939, was
51% owned by the government and 49% by the private sector. The government of Perez
bought the stake owned by the private sector and placed several of its cabinet members
on the board of the central bank wiping out in practice its independence.
Perez, in addition, nationalized the oil and iron industry and established new state owned
companies financed with high oil prices induced by the Arab oil embargo and by a very
lax U.S. monetary policy. These nationalizations ended the precarious balance that
existed between the civil society and the political society and marked the commencement
of a patrimonial government.
In spite of tripling fiscal revenues due to oil boom, the government started a debt
rampage also used to finance governmental enterprises. Finally, clear signs of corruption
surfaced in the judicial system.
The following government of Luis Herrera at least doubled external debt and in 1983
devalued the bolivar to more than 7 bolivares per dollar. Devaluation has remained a
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common place policy and today the official exchange rate is Bs 2,150.00 per dollar and in
the so-called parallel market hovers around Bs 4,000.00. Herrera established exchange
rate controls that were a source of substantial amount of corruption, not surprisingly, that
mostly surfaced in the following government of Lusinchi who basically continued the
socialist and mercantilist economic policies of his predecessors.
In the late eighties Venezuelans elected for the second time Carlos Andres Perez. The
government signed an agreement with the International Monetary Fund and under the
banner of market reforms continued to devalue; inflation never broke the floor of 30%
and implemented new taxes like the VAT in spite of poorly provided government
services and that government owned the commanding heights of the economy.
Unfortunately, IMF bureaucrats would have never recommended the better approach of
adopting the VAT with reduction or elimination of income taxes, making the tax reform
income neutral.
The Perez government liberated most prices, rent controls remained in place, but in an
inflationary environment the positive impact of eliminating price controls is to a certain
extent lost. Price increases in a no inflationary environment serve as signals of relative
scarcity. When there is inflation is difficult to disentangle the signal effect from the
overall tendency of prices to increase.
The Perez administration liberated international trade, reducing tariffs unilaterally.
However, in an environment of great uncertainties, high inflation and high cost of doing
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business, perhaps is not a good time for trade liberation given the clout of inefficient
entrepreneurs through their influence in the media and rival politicians who typically are
not friends of market solutions. In other words, a timing issue, a desirable sequence of
reforms perhaps needs to be addressed whereby inflation is tamed and measures towards
reducing the cost of business and igniting growth are adopted. In a stabilized growing
economy, which goes a long way in winning popular support for reforms, unilateral trade
liberalization is pursued.
The Perez government also sponsored gasoline price increases in an attempt to bring the
price more in line with the cost of production, phasing out the governmental subsidy.
Like trade liberalization this is also a good policy. Nonetheless, a timing issue under
democratic rule is perhaps also warranted. For average Venezuelans is difficult to accept
to pay higher prices for gasoline where part of the implicit contract with government is
that oil is owned by the state and impoverished citizens in exchange get subsidized gas
prices. Again, maybe a better moment to increase gas prices is under a sustainable growth
environment whereby people perceive better prospects ahead.
Apparently it is quite important that reforms induce high and sustainable growth rates to
secure approval by the populace of new economic policies. The reelections of Fujimori in
Peru, Menem in Argentina and Cardozo in Brasil were driven by high growth
accompanied by disinflation. During the Perez government the economy grew at a
healthy pace, however, this growth was fueled by high oil prices that financed greater
government expenditures.3 When oil prices fell growth subsided. Moreover, the
3 High oil prices which were generated by the Gulf War conflict.
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beneficial effects of growth in terms of increasing real wages and welfare were
substantially offset by high inflation. Thus, growth under Perez was not led by greater
private investment and in general enhanced economic activity in the private sector
induced by brighter economic prospects.4
The Perez government privatized the telephone company, CANTV, and sold half of the
airline company VIASA to the government of Spain. However, to exact a high price for
the telephone company it extended a 10 year monopoly to the new owners which
precluded consumers from enjoying the benefits of greater competition in the short run.
Notwithstanding the monopoly issue, service quality improved substantially. VIASA
eventually went bankrupt and was liquidated, its demise a least spared Venezuelans from
financing 50% of the losses.
While Mr. Perez was under house arrest, for relatively speaking minor corruption
charges, I visited him with a group of students who knew him. During the interview I
asked his opinion about a possible privatization of PDVSA, the state owned oil
monopoly. He answered that such a privatization would be equivalent to him selling his
home. This personal anecdote illustrates the mindset of his economic policies:
government control and ownership of the commanding heights of the economy. Not
growth engendered by the private sector, neither national nor foreign.
4 Higher governmental expenditures should not increase output substantially since to finance it is necessaryto take away resources from the private sector and to transfer those resources to the government. Not tomention the distortion of incentives if it is financed by greater taxes. Higher oil prices, however, amount tomore taxes paid by U.S. consumers. Thus if there is a place where the Keynesian view might work is inVenezuela. However, there are no signs of a multiplier effect since the ratio government spending to GDPactually increases in the wake of high oil prices.
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Needless to say, the ill-conceived policies of the IMF, some due to content others to
timing, were very unpopular and contributed to disillusion people with market reforms
engendering a constituency for price and interest controls and no more privatizations.
These sentiments played a major role on the election for the second time of Rafael
Caldera who went back to all sort of controls. The economy was on an unsustainable path
and Caldera ended up signing another agreement with the IMF characterized by inflation,
devaluation and a new tax to bank related financial transactions.
A simple way of summarizing the problems afflicting the Venezuelan economy is that
peoples’ right to the pursuit of property is severely limited. The following rights, all
related to the protection of private property, are denied to Venezuelans. a) The right to
earn on a hard currency. b) The right to pay low taxes. c) The right to spend your income
on the cheapest good produced on any part of the world. d) The right to convert the fruit
of your labor into any currency of the world. d) The right to pursue work and ownership
in any activity deemed legal. e) The right of entrepreneurs to charge whatever price they
consider suitable. f) The right of bankers to charge the interest of their liking and to
extend or deny credit to anyone the feel it is appropriate. g) The right to contract freely in
the labor market. h) The right to a well functioning judicial system that protects property
rights and punishes violators of these rights.
Given the systematic violations of these property rights it should be unsurprising
Venezuela’s condition as a growth disaster. The lack of performance of the Venezuelan
economy, the attendant increase of poverty coupled with the idea that IMF recipe is
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equivalent to capitalism, fostered propitious conditions for the advent of the populist
government with autocratic tendencies of Hugo Chavez5.
Chavez wins easily the elections in 1998 campaigning against the so-called Punto Fijo
Pact that generated the “corrupt policies of the last forty years”. Chavez projecting an
image of an outsider banked politically on the growth disaster and impoverishment
engendered by the perverse economic policies implemented systematically and most
prominently since 1958. Chavez promised to put an end to these policies under his
government.
Ironically, however, Chavez has not only implemented the perverse policies of his
predecessors but in some instances has exacerbated past policy mistakes. Inflation,
devaluation, price, interest rate and exchange controls, reduced independence of the
central bank and of the judiciary, rampant corruption, impunity, state owned companies,
land reform, complex tax and labor legislation are all policies not invented by Chavez.
Nonetheless, these policies are ubiquitous under the Chavez government. In some cases
past mistakes have been exacerbated. For example, recently the Chavez administration
has nationalized the telephone company, CANTV, and Electricidad de Caracas, an
electric-utility company.6 Viasa, the airline company, was liquidated as previously
mentioned, but the Chavez government revived the company founding a new airline
called “Conviasa”.
5 Another well-known example of poor economic performance driving non democratic outcomes is theGreat Depression which fostered militarism in Japan, Nazism in Germany, Fascism in Italy and centralplanning practices in many Western economies.6 This is the second nationalization of the CANTV; the first one took place in 1950 under the dictatorship of Perez Jimenez.
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Chavez has encountered a fertile ground to promote class-warfare given the rise in
poverty levels and rational ignorance of the population on economic issues. Basically,
Chavez attributes the existence of poverty to the capitalist policies of the past, also called
by him savage neoliberal economic policies. He is extremely charismatic with the low
income population and has the tale wind of high oil prices that have allowed him to
pursue more redistributionist policies and to ignite growth7 by virtue of greater
government expenditures.
A Poverty Trap
Clearly what ails Venezuela is socialism and mercantilism. An unmistakable
manifestation of socialism is that the commanding heights of the economy, oil, steel, gas,
coal, electricity, water, are owned by the government and the numerous interferences of
the government with the workings of free markets. Obvious expressions of mercantilism
are prohibitions that common citizens face to import sugar, milk, rice, sorghum and used
cars, among others, from most countries such as the U.S. New cars, clothes and shoes for
example face a stiff tariff of 35%. The existence antidumping and safeguard laws that are
typically abused by inefficient entrepreneurs in connivance with government officials.
Finally, import quotas that are granted to domestic producers after the internal production
has been sold.
7 High oil prices also temporarily ignited growth under both of Perez’s administrations.
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Socialism and mercantilism mutually reinforce each other because both have in common
the destruction of free markets. The philosophical pillars of socialism reject free markets
as an efficient mechanism to allocate scarce resources. Mercantilism negates free markets
for utilitarian reasons. That is, entrepreneurs seek shelter from competition manipulating
government and the latter grants impediment to trade in exchange for private benefits,
and power. Alternatively, the government extends protection to entrepreneurs to enhance
politicians control and/or they see themselves presiding over an industrial empire. The
initial impetus of protectionism, government or entrepreneurs, is not totally clear but the
consequences are transparent: to increase the cost of living to ordinary citizens
8
.
There are numerous events where the interaction of socialism and mercantilism
contribute to induce inertial forces that maintain a perverse status quo. For example,
Chavez coming from a socialist perspective frequently disparages the Bush government
initiative of free trade. Many entrepreneurs in the country take solace from Chavez’s
criticism because trade barriers will not fall precluding competition. Similarly, when
Chavez vilifies capitalism, inefficient entrepreneurs take comfort because capitalism will
not come to Venezuelan shores and therefore they will not have to reckon with
competition.
Another case of this unholy alliance between socialism and mercantilism is the alleged
tendency for the local currency to become overvalued. Numerous economists indicate
8 Since access to wealth by privileged entrepreneurs under mercantilism is based on “know who” and noton “know how” riches accumulated is a source of irritation because it is associated, rightly so, with acorrupt practice. Moreover, the ubiquitous problem of envy linked to inequality is exacerbated under mercantilist practices engendering undesirable social stress whereby wealth is stigmatized. Further, thismercantilist root of wealth accumulation typically does not translate into prosperity and welfare for thepeople creating a fertile ground for Chavez rhetoric against riches and capitalism.
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that the bolivar is overvalued, which is a code word for devaluation, that is, for the need
to rob the people of their hard earned work. The government benefits from devaluing the
currency because dollars obtained through exports of oil can be exchanged for more
bolivares, and non competitive entrepreneurs also benefit because of the destruction
competition due to the higher price of imported goods.
Complex taxation, regulation and labor laws also promote socialistic and mercantilist
objectives. Socialists thrive in complexity under the conviction that complex rules
achieve cosmic justice, (Sowell 1999). Well established, most likely big companies love
complexity because it serves as access barriers, eliminating potential competition from
smaller companies that cannot survive under convoluted rules. It is revealing that leaders
of CONINDUSTRIA, a guild of managers and owners from the Venezuelan industrial
sector, typically do not advocate for the need to reduce the cost of doing business in
Venezuela. Usually, they plea for a “competitive currency” and for the reduction of
imports, “justified” on the grounds of employment creation.
Direct beneficiaries of socialism and mercantilism are conspicuous Venezuelans with
substantial influence in the media and in the political decision making process.
Consequently, it is very difficult to extricate the economy from such an impoverishing
self perpetuating equilibrium. This I would suggest is a condition that plagues most Latin
American countries explaining why most economies south of the Rio Grande remain
stagnant or show pyrrhic growth rates.
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Collective Action Problems
It is well known that public institutions are non rival, that is, are subject of joint
consumption, that is, the good can be consumed simultaneously and totally by many
consumers. For example the benefits of a good judiciary system is a public good, not only
non rival but also non excludable. In other words, it is very difficult to impede access of
consumers once the good is produced. By the same token, the benefits of free trade, the
benefits of monetary freedom, and the benefits of simple and low tax laws, among others,
are public goods9.
The Neo Classical explanation for underproduction of these goods is market failure and
therefore the need for government intervention. That is, the free market mechanism fails
to produce an “optimal” amount the good, hence the need for a governmental solution.
The market fails due to consumers’ inability to display collective action in spite of being
consumers the ultimate beneficiaries of the public good, (Olson 1977) provides a seminal
explanation along this lines10. Consumers are beset by problems of a) group size, b) free
riding and c) rational ignorance.
a) Group Size. Basically the number of consumers is too large to be able to organize
them efficiently. Consumers are beleaguered by the same problems that afflict
participants in the prisoners’ dilemma game. It is difficult to communicate and to
establish binding agreements.
9 The classical example of a public good is national defense. Another example is ideas like calculus.10 (Cowen and Crampton 2002, 3) assert that “a consensus developed that governments should provide atleast a few public goods, such as national defense, but markets do the best job of providing most goods andservices”. They stress convincingly that much of the new market failure theories based on asymmetricinformation, efficiency wages and lock-in are bogus.
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b) Free Riding. Once the public good is produced everybody benefits whether one
contributes or not to its production. Since contribution is costly consumers expect
others to contribute. If most consumers react in the same way no one contributes,
consumers attempt to free ride, and no collective action is undertaken.
c) Rational Ignorance. It is costly to become informed about good economic
policies. If the benefits from becoming informed do not outweigh the costs,
people remain ignorant about policies that will benefit them hindering collective
action.
In short, consumers remain indifferent, in spite of policies inimical to their best interest,
and will not exert lobbying efforts or pressures before public officials. On the contrary,
beneficiaries of perverse policies will do whatever is possible to preserve the status
enjoying the benefits of protection, also a public good but dispersed to a much smaller
group. In this fashion public goods such as the benefits of free trade or of a stable
currency are under produced.
An alternative interpretation is that under production of the aforementioned public goods
is rooted not in market failure, but in the government’s inability to fulfill its most
important mandate: to protect peoples’ natural rights among them the right to pursue
property. In other words, the Venezuelan government has failed to produce the benefits
of free trade, stable currency, low taxes; transparent justice among others because of an
ill advised interference on the economy.
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The Venezuelan government is the ultimate responsible for the erection of trade barriers,
currency devaluation and forcing Venezuelans to use exclusively the bolivar. Ironically,
government intervention is the root cause of failure to produce optimally public goods.
Likewise, one of the major duties of government is to provide a sound justice system.
Corruption and lack of independence of Venezuela’s judicial system is another example
of ultimately government failing its people. The same goes for complex regulation, rigid
labor laws and lack of personal security.
The Foundation of Freedoms
Parliamentary Democracy was born in England as a result of a Coasean bargain between
the crown on one side and nobles and the people on the other, whereby funds were
provided to the King in exchange for protection of basic freedoms (Pipes 1999, Glaeser
and Shleifer 2002, 1208)11. That is, the crown needed the people to survive because the
most important owners of land and creators of wealth were the people who consented to
be taxed for a price: protection of property with the ensuing freedom.
The Venezuelan institutional arrangements, and of OPEC countries, are not conducive for
the dawn of stable democracies because governments are patrimonial. That is, the
sovereign is also the owner; hence there is no binding check on the Leviathan. It is
revealing that most OPEC countries are secular or religious autocracies and perhaps not
11 “In fact, one can view the Magna Carta as a remarkable example of an early Coasean bargain, in whichthe community and the crown agree on a cash transfer needed to support the efficient outcome”, Glaeser and Shleifer (2002). Djanko, Glaeser, La Porta, Lopez-de-Silanes and Shleifer (2003, 613) also conceivethe adoption of the U.S. Constitution as a Coasean bargain.
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coincidentally, oil is owned by government. The light of democracy in Venezuela,
another OPEC country, is also waning. This is a manifestation of the “natural resource
curse”, (Sala-i-Martin and Subramanian 2003, 5). A revealing illustration, of perverse
outcomes rooted in Venezuela’s patrimonial government that bypasses the will of the
people, is provided by (Alvaro Vargas-Llosa 2006):
Chávez buys influence through oil. It is a form of blackmail: At OPEC, Chávez fights for increasing prices, making life hard for poor countries that import oil, and then offersthose very nations oil subsidies they have no choice but to accept. That is what happenedwith the 14 Caribbean countries that make up the Caricom group. He also sends 100,000
barrels of oil to Cuba daily; and 200,000 barrels to Bolivia every month in exchange for soy, poultry and political subservience. And he has bought $3 billion worth of Argentinebonds to entice President Kirchner's loyalty. Chávez is denying his nation its wealth fromoil, somewhere between $40 billion and $50 billion a year. His annual "aid" budget totalsmore than $2 billion. He sponsors 30 countries, including some in Africa, in order to buytheir vote for a seat at the U.N. Security Council.
Chavez is capable of denying his nation its wealth from oil, as Vargas-Llosa notes, in
essence because the government and not the people is the oil wealth owner 12. This
ownership allows the government to require oil companies to pay taxes directly to the
government. Perhaps this “bypassing the people effect” would be substantially
diminished if oil taxes were equally divided among all Venezuelans eighteen years and
older. In this fashion to obtain revenues the government would have to tax the people,
ideally through consumption taxes, and in exchange the people most likely would
demand protection of basic rights and governmental quality13.
12 Needless to say Chavez predecessors also misused oil wealth not just because they embarked in all sortsof wasteful programs but for the basic fact that governments typically do not spend money as wisely ascitizens.13 It is advisable that all the people experience the burden of government. Consumption taxes are better suited for this purpose than income taxes. In addition, the existence of a unique tax rate, more commonlyfound among taxes on expenditures, minimizes social conflicts of the sorts induced by gradual incometaxes. Finally, consumption taxes are less costly to administer.
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As Vernon Smith puts it in relation to another OPEC country: “A central issue in Iraq—
as well as the U.S. and other countries---remains whether the people control government
thorough through voting and taxes or the government controls the people through a
monopoly on natural resources,” (Smith, 2003). Looking at the problem in this light
apparently the curse is not the existence or not of oil but who owns the oil, politicians or
the people.
A perverse consequence of socialist institutions and patrimonial governments is that
people live off the state. Peoples´ energies are channeled to penetrate the state through
political entrepreneurship seeking wealth transfers from government and not procuring
wealth creation. The addiction of the people to governmental largess induced by socialist
institutions is exacerbated by mercantilist institutions. The most influential entrepreneurs
in Venezuela have accumulated wealth by virtue of various impediments to trade
implemented by government. When entrepreneurs supplicate for governmental protection
because their farm or industry has been invaded by outsiders or workers, it falls on deaf
ears because public officials know that those businesses exist thanks to governmental
favors. Moreover, the plea is not legitimate because business owners want protection of
their property, which is very reasonable. However, the barriers to competition enacted at
the behest of these same business owners-rent seekers constitutes a confiscation of
property of common citizens by forcing consumers to buy more expensive domestically
produced goods. Interestingly, in patrimonial governments, businesses are captured by
government.
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Other Obstacles to Freedom
All stable and flourishing liberal democracies not only are financed by the people but a
competition among economic groups and entrepreneurs lobbying government for
different policies is observed14. This competition among pressure groups lobbying
government has important historical roots, (De Long and Shleifer 1993) document
important historical evidence on the role of entrepreneurs in promoting conditions
propitious for growth:
European history also presents cases where cities grew rapidly and commerce flourishedin the absence of strong princes in regions where political power was held by merchantoligarchies or checked by constitutional limitations and representative assemblies. Thecity-states of northern Italy, of the Low Countries, and of Burgundy prospered and grewin the later Middle Ages and the Renaissance before they came under autocraticHabsburg control in the sixteenth century. (672)
By contrast, limited governments are more concerned with private economic prosperity:either they are led by merchant oligarchs who have a stronger interest in maintaining andexpanding the flow of commerce than in the power of the state and the splendor of thecourt, or they give a veto parliaments or estates-general that feel the weight of heavytaxes. (674)
Corn Laws and their repeal in Britain is a better known more recent case. In 1804 under
pressure from landowners was introduced in Parliament a Corn Law that sought to
protect farmers’ profits imposing a duty on imported corn. On May 15, 1846 the repeal of
the Corn Laws was passed at the request of Prime Minister Sir Robert Peel whose wealth
came from his family’s textile mills. Manufacturers’ fearing higher wages wanted to
eliminate tariffs on imported corn. In other words, manufacturers’ defending their own
interest were also furthering the welfare of Britain’s people. Hence, not necessarily
14 This competition among pressure groups has been theoretically modeled by (Becker 1983 and 1985)
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altruistic motives were behind Robert Peel’s political action. Peel was defending his
personal interest, and those of industrialists, and it happened to be aligned with the
interest of consumers. This account is consistent with the view of Buchanan and Tullock
that people are people and as such we are always pursuing our self-good and not
necessarily the common-good, (Buchanan 1999 and Tullock, Seldon and Brady 2002).
A present day example worth looking into is President George W. Bush’s initiative of a
Free Trade Area of the Americas (FTAA). Is this initiative driven by American
consumers that want to buy less expensive goods or by entrepreneurs that to export more
would like to see the U.S. government lowering its trade barriers to induce other
countries to do the same? Moreover, is President Bush backing this initiative out of
concern for American consumers’ pocket or political supporters’ wallet width? The point
is that this is a situation where efficient entrepreneurs lobby government, in competition
against other entrepreneurs and the AFL-CIO, for policies that better their lot but also
American and Latin Americans consumers’ welfare15.
This line of reasoning leads to another obstacle to freedom and growth in Venezuela,
namely the absence of leadership, in particular of well-organized pressure group by
efficient entrepreneurs. Consider the recent political events of April 2002 where for 36
15Needless to say, the best antidote for less lobbying activity, which detracts entrepreneurs’ valuable time
from truly wealth creating endeavors, is a small government with little intrusions in the economy.However, given the current size and intrusions of government a way to reduce government is implementingpolicies that increase competition, partly induced by the collective action of efficient entrepreneurs. I wouldhypothesize that the size of the U.S. government today would be much larger if it were not for the backingof efficient entrepreneurs that support the view of limited government.
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hours Chavez was deposed by popular and peaceful demonstrations with the help of the
military. The opposition leader was Mr. Pedro Carmona a high ranking entrepreneur who
came from a heavily protected corporation. In spite of his background many libertarians
in Venezuela supported Mr. Carmona and were signatories of a document purported to
legitimize Mr. Carmona’s presidency.
In last year’s election the opposition leader, Mr. Manuel Rosales, was a professional
politician. However, his policy promises were mostly redistributionist with no plans to
move back the frontiers of socialism and mercantilism in Venezuela. Of course part of his
campaign financing came from traditional inefficient economic groups.
RCTV was an open signal TV station whose license to operate was arbitrarily, in
violation of freedom of speech, revoked by the Chavez government on May of 2007. In
spite of the fact that RCTV was watched mainly by low income people, where Chavez
draws much of its political support, the editorial line of this station did not produce
programs commercially attractive but at the same time educational showing for example
during its numerous and widely viewed soap operas the negative welfare consequences of
inflation, devaluation, trade barriers and price controls just to mention a few 16. It chose,
however, a political line of opposition attacking the government for its numerous
violations of political and civil rights, which in itself is not bad except for the fact that
most Venezuelans saw their personal economic situation deteriorate under democratic
rule with free elections and freedom of the press. Hence, the freedom of the press
16 Is there a Venezuelan that would have refused to receive shares of PDVSA, tax dollars from oilcorporations or to pay less for imported goods as a result of eliminating trade barriers? Thus in spite of numerous policies with wide appeal that empower people, the opposition leaders to Chavez have been sofar incapable of articulating such a popular media campaign.
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discourse and the political liberty speech does not necessarily touch a sensitive chord
among low income Venezuelans because it lacks credibility, particularly when it is
articulated by leaders mostly associated, rightfully or not, with past corrupt policies.
The reaction of the owners of RCTV was substantially better than rival VeneVision,
owned by Mr. Gustavo Cisneros one of the wealthiest persons of Latin America with well
diversified investments across the globe. After a meeting with President Chavez and
former U.S. President Jimmy Carter in Caracas, VeneVision in the year of 2004 ceased to
make any comment that could damage the reputation of the Chavez government, i.e., auto
censorship.
In contrast, in the U.S. for example there is intense competition, with quite different
political and economic orientations, between Fox News and CNN. Likewise the editorial
lines of the Wall Street Journal and the New York Times are very dissimilar. Not to
mention the existence of Think Tanks with markedly distinct orientation. Part of the
explanation for the existence of these diverse views of the world of different
organizations is the economic support provided by entrepreneurs of different stripes.
Apparently entrepreneurs are less afflicted by the problems of collective action that on
average stifles consumers. The group numbers are smaller and the profits to be reaped
provide the necessary incentives to be well-informed and to spend time in organizing and
coordinating an effective lobbying effort.
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Probable Scenarios
Given the problems of collective action faced by consumers, the ability of a patrimonial
government to capture managers and business owners, the lack of entrepreneurial
leadership of Venezuela’s most prominent business person, and the inertial forces of a
perverse status quo whereby socialism and mercantilism are mutually reinforced, it is
very unlikely that opposition leaders will be able garner the support of most Venezuelans
to oust Chavez based on a future capitalist economy. It is more likely a Chavez crash due
to all his policy mistakes which now do not surface with sufficient force because of high
oil prices.
Moreover, it is probable that the ousting of Chavez will be prompted by the same leaders,
some of them from the military, which today support him. This scenario, however, does
not necessarily augur good economic prospects. Venezuela’s men in military uniform
come from a socialist persuasion. Further, dictatorships in general are no panacea for
growth17. Examples abound of dictatorships in Latin America and other parts of the world
that have failed to bring about reforms capable of igniting high and sustained growth 18.
Finally, oil revenues serve as a floor that prevents a crisis of major proportions capable of
inflicting enough pain to disenchant Venezuelans with socialism and mercantilism.
17 (Glaeser et al. 2004, 287) report that dictatorships on average grow less than democracies for the period1960-2000.18 Democracy, on the other hand, is not critical for growth either, (Snowdon, 2006, 15). There are many
democracies around the world that are rich and poor suggesting that the correlation between growth anddemocracy is zero. This view is expressed by Xavier Sala-i-Martin in an interview to Snowdon cited above.
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Another probable and more optimistic scenario is that Venezuela experiences the Eastern
European Countries Syndrome whereby suffering at the hand of communism was so
acute that now these economies are more capitalist and their leaders more pro-American
than their Western European counterparts. It is conceivable that suffering inflicted by
Chavez policies induces Venezuelans and its leaders to look for refuge in capitalism as an
antidote for our chronic stagnation and concomitant high levels of critical poverty 19.
Conclusions
This paper has shown that up to the fifties the Venezuelan economy exhibited high levels
of economic freedom which is consistent with the miracle growth rates that Venezuela
experienced between 1920 and 1957. Not surprisingly, these high levels of economic
freedom served as a catalyst for the introduction of democratic rule increasing
Venezuelans’ levels of political and civil liberties. This is another example of a positive
correlation between economic and political freedoms, (La Porta, Lopez-de-Silanes, Pop-
Eleches and Shleifer 2004, 452-453) and consistent with the Lipset-Barro hypothesis that
prosperity tends to inspire democracy, (Lipset, 1959 and Barro 1996, 1997 and 1999).
The inception of democracy brought more redistributionist policies and greater influence
of rent-seeking pressure groups that had the effect of undermining economic freedoms to
the extent of instigating on average negative growth over the period 1960-2006. This is
19 Outside intervention, namely a U.S. invasion is now days unlikely. As the Wall Street Journaleditorialized on July 3, 2007, “Regime change against dictators who let their people starve is nowconsidered to be unacceptable. That's the policy of Tony Blair, who just stepped down, and President Bush,who's a short-timer. Nowadays the habit is to cajole, bribe or beg despots to stop their depredations --whether in Sudan, North Korea, Zimbabwe”
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an example of growth-retarding features of democracy, (Barro 1996, 2). As expected,
lower levels of prosperity have induced social unrest and created an environment
conducive for the emergence of a populist leader who blames “capitalism” for peoples’
impoverishment.
This paper singles out several factors that militate against the prospects of destroying
socialist and mercantilist institutions and replacing them with market economy
institutions. Among them are problems of collective action, a patrimonial government
that bribes its people, lack of entrepreneurial and political leadership, and the inertial
forces of socialism and mercantilism given that both practices mutually reinforce each
other across time. These same factors preclude the scenario of opposition leaders credibly
convincing the populace that without Chavez their living standards will improve.
Thus myopic and self-serving political and entrepreneurial elites are responsible for this
flagrant case of government failure. Even more worrisome is that judging by the
discourse of political leaders and opinions to media outlets of most pundits we have not
learnt our lesson. That is, there is no consensus among leaders of the opposition that we
urgently need to dismantle socialist and mercantilist institutions.
Given these considerations the most likely scenario, barring outside intervention, is that
Chavez will discredit himself and today friends in government may become tomorrow his
political foes and oust him. This scenario does not necessarily bode well for the economy
because our military are formed in the socialist school of thought. There is, however, the
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possibility that given all the wounds inflicted to the economy by Chavez we learn our
lesson and end up embracing capitalism.
In sum, the problems that plague the Venezuelan economy transcend Chavez. Moreover,
Chavez is a consequence of the unsurprisingly failure of socialism and mercantilism
implanted gradually in Venezuela and commencing with the first nationalization of the
telephone company in 1950. Further, getting rid of Chavez may be a necessary condition
to overcome our problems though not sufficient. Consequently, most analyses about
Venezuela that mainly center their attention on Chavez are simplistic. A more fruitful line
of inquiry is to uncover mechanisms capable of dismantling, under democratic rule which
is prevalent in Latin America, socialism and mercantilism.
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