Written as a paper for the research module Global Inequality � master International Relations and International Organization �lecturer: G.C. van Roozendaal � University of Groningen� June 30th 2011

Desi Boesveld � s1387650 � desiboesveld@gmail.com �

Income redistribution in Venezuelathe effectiveness of Chavez’s policies against income inequality

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Contents

Introduction............................................................................................2

Income inequality within Venezuela........................................................4The Gini index......................................................................................... 4Gini data on Venezuela ............................................................................ 4Income distribution in quintiles for Venezuela ............................................. 5

Redistribution measures by the Venezuela government..........................7Land redistribution .................................................................................. 7Redistribution via public goods.................................................................. 8

Effectiveness of Venezuelan redistribution measures ...........................10Short term: closing the income gap ......................................................... 10Long term: oil, debts and reputation........................................................ 10

Conclusion.............................................................................................13

Bibliography..........................................................................................15

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Introduction

One of the most charismatic and controversial leaders in today’s world is Hugo Chavez.

The president of Venezuela runs the country as a socialist state, with his main aim being

stated as a “social revolution” that will promote the interests of the country’s poor. Via a

system of “misiones” (the country’s name for a set of social policies), his government

seeks to redistribute income towards the marginalised. These policies have ensured

Chavez’s popularity over the years, ever since his landslide victory in the presidential

elections of 1998, with the poorest parts of Venezuelan society. These people also

formed the electoral basis for his re-election in the beginning of 2011. The redistribution

measures are for the largest part financed by the countries oil revenues, that make up a

substantial part of the national economy and thus provide the government with a source

of readily available money to be used at its own disposition. (BBC website, profile: Hugo

Chavez, 2011)

This paper aims to assess whether these redistribution attempts are providing an

effective basis for countering the countries income inequality. Its central question will

therefore be: to what extent can the Venezuelan redistribution policies to counter the

effects of domestic income inequality, between 1998 and now, be considered effective?

In order to answer this question, the first part of this paper will investigate how income is

distributed in Venezuela. It will examine how income is distributed over the Venezuelan

population, by looking at both its score on the Gini index over a longer period of time and

the distribution of income over different quintiles of the population. The second part will

then look at how the government is addressing the inequality of income distribution. This

section will look at the policies that the Chavez regime has developed to combat the

large gap between Venezuela’s richest and poorest. The third part will assess how

effective these measures are and whether they can be considered sustainable and

effective on the long run. It will look at whether positive outcomes of the policies can

already be seen and how they are expected to develop in the future, but will also

examine the economic and political costs of the measures and whether they are truly

sustainable over a longer period of time. Figure 1 addresses the break down of the

research into variables and indicators.

Figure 1 operationalization of research question into variables and measurable indicators.

Examining the way Venezuela is attempting to combat income inequality can

provide us with useful insights in the mechanisms of domestic income inequality and

Dependent variable Independent

variables

How to measure

Effectiveness of

redistribution measures

- short term outcomes

- long term outcomes

- development of GINI

- development of quintile

distribution

- costs of measures

- sustainability of measures

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income redistribution. And since Venezuela is often seen as an example of an ideal type

socialist regime by other socialist leaders in Latin America, further understanding of how

the country addresses the important issue of inequality and how its measures work out

economically may be able to affect the extent to which other countries will follow in its

footsteps. Venezuela may be seen as a shiny example of the socialist dream of a state

that works towards the equality of its citizens, but how much of this image is actually

true?

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Income inequality within Venezuela

Income inequality within nations is at least up to a certain level a natural phenomenon.

Differences in wages and other forms of income are known to all countries. But the depth

of this inequality, or the width of this income gap, is not the same everywhere. A country

where the difference between the highest and lowest incomes is relatively small is

considered egalitarian, this is the case for many countries in the northern part of Europe.

Developing countries often show large income gaps. The following chapter will examine

how income is distributed in Venezuela.

The Gini indexAll nations know some level of income inequality, so to some degree this is a natural

phenomenon. This income inequality, between those who earn the most and those who

earn the least, is often measured using the Gini index. This complex method calculates

the level of inequality in income within a certain group, usually a nation, and scales that

inequality between 0 and 1 (or sometimes 0 and 100). A nation where everyone attains

the same income scores a perfect 0 and likewise, a country where all income is earned by

just one person scores 1. Since all nations exhibit at least a small level of income

inequality, debates have been going on about what is an acceptable amount of

inequality. Especially since some theories, for instance liberalism, see some level of

income inequality as a necessary incentive for competition.

The Gini coefficient is calculated by looking at a Lorenz curve (B) of income

distribution, see figure 2 This curve shows the cumulative income share on the X axis

and the cumulative population share on the Y

axis. This line is compared to a line of equal

distribution (A) and the Gini coefficient is

calculated as the are of A divided by the area

AB. In a perfectly even distribution situation,

this calculation would lead to 0 and in a

completely imperfect distribution situation to 1.

What the acceptable amount of income

inequality really is, is open for a lot of discussion

(both practical and normative). From a liberal

perspective a certain level of income inequality

is needed as an incentive for working hard and

taking risks, whilst others, especially from a

Marxist perspective, deem anything but as close

to zero as possible undesirable.

Gini data on Venezuela In order to see whether income in Venezuela is distributed (un)evenly, its Gini scores will

be examined next. The data used to compile figure 3 are derived from the Venezuelan

National Statistics Institute, since they provide income distribution numbers on

Figure 2 Calculating Gini index(Taken from the World Bank Website,

“Measuring Inequality”, http://go.worldbank.org/3SLYUTVY00)

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Venezuela for all years over a longer period of time.1 Figure 3 shows that distribution of

income within the country measured using the Gini method has varied within the 0.4 –

0.5 range, and has been declining ever since 2005. These data show that Venezuela

has a relatively high Gini coefficient, in the period between 1997 and 2009 2 on average

0.4511, which of course indicates that income is distributed quite unevenly across the

Venezuelan population. To illustrate, European countries are under the 0.35 mark, and

Venezuela’s Gini coefficient is much higher than that of Middle Eastern countries, India

and Indonesia. It is however lower than Gini scores for African countries and similar to

other Latin American countries.

Figure 2. Venezuelan income distribution during the period 1997 – 2009

(based on information from the Instituto Nacional de Estadística (INE) República Bolivariana de Venezuela, http://www.ine.gov.ve/pobreza/concentracion_ingreso.asp)

Income distribution in quintiles for VenezuelaOf course, using the Gini coefficient is not the only way to examine income inequality

within a nation. It is useful in the way that it provides one clear number that can be

compared to other numbers of other countries quite easily. Yet how this income

distribution inequality within a nation is truly made up, is not obvious. A method that

does allow one to see how income is spread over different parts of the population is the

20/20 method. This method breaks a population down to quintiles (groups containing 20

percent of the total population) and shows how income is distributed over the poorest 20

percent, the richest 20 percent and the three quintiles in between. One can now clearly

see how much of the income of a nation is held by each of these groups.

The break-down of this income distribution over quintiles for Venezuela can be

found in figure 3 as well . As these data show, by far the largest part of GDP is held by

1 Other typical providers for these type of data, e.g. the World Bank and the United States State Department show gaps in the information for certain years.2 Information on income distribution for 2010 was not yet available at the time this paper was constructed.

Year Gini coefficient

Quintile 1poorest 20%

Quintile 2 Quintile 3

Quintile 4

Quintile 4richest 20%

1997 0.4874 4.10 8.20 13.24 20.88 53.58

1998 0.4865 4.06 8.49 13.02 21.07 53.36

1999 0.4693 4.36 9.10 13.22 21.41 51.90

2000 0.4772 3.95 8.62 13.53 21.63 52.28

2001 0.4573 4.45 9.93 13.07 23.00 49.55

2002 0.4938 4.40 7.94 12.64 20.88 54.13

2003 0.4811 4.01 8.83 12.96 21.37 52.83

2004 0.4559 3.53 7.60 12.94 21.15 54.77

2005 0.4748 4.63 8.35 15.87 18.78 52.36

2006 0.4422 4.73 9.35 14.45 22.09 49.37

2007 0.4237 5.09 10.40 14.24 22.56 47.71

2008 0.4099 5.41 10.54 15.06 22.26 46.73

2009 0.4068 6.01 9.97 15.24 23.23 45.56

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the richest 20 per cent of the population, although their part of Venezuelan income has

been steadily declining in favour of the lowest quintiles.

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Redistribution measures by the Venezuela government

The Venezuelan government is not only aware of these high levels of income inequality,

it has made the bridging of the gap between rich and poor its central policy aim. Since

his election in 1998, in which his main platform was redistribution of the countries oil

wealth, Venezuelan president Hugo Chavez has started many projects that were designed

to overcome both income inequality and its effects. (Ellsworth 2004, 1) This part of the

paper will look into the different forms in which redistribution from the wealthy towards

the poor takes place: land distribution, government sponsored public services and food

subsidizing and investigates how these measures are given form and are financed.

Land redistributionOne of the most eye-catching measures aimed at reducing income inequality has been

the distribution of farm lands towards poor farmers. The constitution that Chavez put in

place in 1999 set a base for this policy by stating in article 306 that “The state will

provide for holistic development, with the purpose of generating employment and

guaranteeing the peasant population an adequate level of well-being, as well as their

incorporation into national development. Similarly, it will support agricultural activity and

the optimal use of land (…) “ (translation taken from Wilpert 2006, 252) But it was not

until 2002 that Chavez actually put laws in place that made it possible for the

government to seize land in order for it to be redistributed to people seeking farm lands.

This act led to widespread opposition, both within parliament and outside, because it was

felt that private property should not be seized by the government to be given away to

others. The anger aroused by this measure was one of the causes for the large petrol

strike in 2002 that practically paralyzed the country’s economy. (Wilpert 2006, 253)

As the constitution already hints, one of the main reasons for the redistribution of

land is to provide the rural population with a source of income and development. It would

also provide Venezuela with more farm products, and thereby help in diversifying the

country’s economy. The idea was that land owners could not own more than a certain

portion of idle (non-used) farmland, depending on the quality of that farm land. If

anyone, whether a private person or a company, owns more idle land than is provided for

by these laws, that land is officially eligible for seizure and subsequent redistribution. Any

acreage of unused land not (yet) seized would also be taxed heavily, as a further

deterrent. Large scale farms and large scale land ownership would come to an end this

way. Farmers seeking farmland could pre-emptively seize idle land, forcing its owner to

court in order to get a judiciary ruling on whether the land was seizable or not. A 2005

law provided that the state would not have to reimburse land owners for any investments

made on these lands (e.g. buildings) if there was a suspicion of the fact that the land

came into their hands illegally (as most large estates had been). This made it rather

cheap for the government to pursue these redistributions. (Wilpert 2006, 254-256)

Between 2002 and 2005 it is estimated that 6.2 million acres of arable land have

been redistributed. The farmers that receive these lands are helped by the government

with low interest rate loans and are given state-sponsored machinery. They are either

small-scale farmers, or organized in cooperatives. These cooperatives were sponsored

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out of the “Misión Vuelvan Caras”, a state financed social project aimed at creating more

jobs in the agricultural sector. (Penfold 2006, 5) And while this provides many people

with a chance of making a decent living, they are also continuously confronted with

violence sponsored by the people who’s land have been taken away. The redistributions

have not only sparked political protests but also assassinations, arson and other forms of

physical abuse. (Ellis 2011, Venezuelan Analysis website.)

Redistribution via public goods

Called “misiones” or “missions to save the people”, the government leads projects that

aim to provide the poor part of the population with access to public goods and to

redistribute the nation’s wealth in this way. The first mission, “Barrio Addentro”, was

focussed on providing health care to the people living in the slum areas of major cities.

This was quickly followed by misiones that targeted access to better education and

alphabetization, the “Misión Robinson” and providing means of identification to people

seeking access to the bank system, “Misión Identidad” which would encourage them to

participate more fully in both society and the economy. (Penford-Becerra 2006, 4-5)

The education misiones have been a large success. Enrolment in primary school

has gone up with 6 per cent between 1999 and 2010, and is now at 93 per cent

according to UNESCO’s Education for All Global Monitoring Report 2010. (UNESCO 2010,

23) According to the Venezuelan statistics institute (INE), the gap between years of

education experienced by the poorest 20 per cent and the richest 20 per cent of the

population has also decreased, which can be attributed to the faster growth in education

years enjoyed by the poor (from 3.92 years in 1999 to 4.46 years in 2009) in relation to

the growth of education years of the rich (8.57 years in 1999 and 8.82 years in 2009).

(Pearson 2010, Venezuelan Analysis website). This catching up by the poorer part of the

population can mainly be attributed to the misiones, that provides access to free public

education and scholarships for adult literacy and education programs. (Penfold-Becerra

2006, 17)

Basic health care in Venezuela is also provided for by the misiones. It includes the

opening of free medical centres, especially in the poorer neighbourhoods and in rural

areas, and vaccination campaigns. The “Misión Barrio” is also considered to be huge

success, and one of the major contributors to the popularity of Hugo Chavez amongst the

poor population. In 2004, the mission provided health care for over 4 million people.

(Penford-Becerra 2006, 17)

Food subsidiesIn 2002, the oil industry went on strike during two moths and this seriously crippled the

Venezuelan economy for the next two years. To counter the negative effects of the strike

on the poor population, the government designed the “Misión Mercal”, meant to

distribute subsidized food directly to the poor Venezuelans via government-led discount

supermarkets everywhere in the country. This system of stores is open to all individuals,

poor or rich, and is now used by approximately 20 million Venezuelans. It is estimated

that about 40 per cent of all food in Venezuela gets distributed though the discount

stores and even private food companies now seek access for their products into the state

markets. Just like the free education and health care programs, the Mercal supermarkets

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are also highly popular with the Venezuelan government and are one of the most

appreciated government measures. (Penford-Becerra 2006, 21-22)

Fonden

Set up in 2005, “Fonden” or the National Development Fund, is one of the major vehicles

for redistribution of petrol money towards the countries poorer population. The oil

industry is obligated by the government to transfer at least ten percent of its earnings

into this special fund, which is managed by one of the state-owned banks. The

government itself also puts money into the fund. Venezuela has never officially revealed

the total balance of Fonden since 2008, and while Chavez himself said at the end of 2009

that the fund had 53 billion US dollars in reserves, estimates by outsiders are much

lower than this, mostly around the 14 to 16 billion dollars mark. Fonden allows the

Venezuelan government to finance social projects with money that is not officially part of

the government budget. (Alvarez and Hanson 2009, CPR website)

Fonden finances a whole string of social projects. Varying from projects that make

drinking water more easily available to people in remote villages and the slums of

Caracas to public transportation projects and from state sponsored health care to state

sponsored education, via the government misiones. (Fonden website, ‘Todos los

projectos’) The spending pattern of Fonden keeps pace with the amount of money

coming in, for instance in 2007 the fund received 27.3 billion US dollars, of which it

spend 20.2 billion dollars towards social projects in the same year. (Carlson 2007,

Venezuelan Analysis website)

The government seeks to redistribute the country’s wealth via state-led programs that

provide free health care and education, subsidized food and land and jobs to the poor

part of the Venezuelan population. These projects are almost entirely financed by

revenues from the oil industry, either by government taxing or the mandatory

contribution to Fonden.

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Effectiveness of Venezuelan redistribution measures

Now that it has been established how the redistribution measures work and how they are

financed, it is time to see whether they are successful at countering the income

inequality within Venezuela and whether they will continue to be successful in the future.

Short term: closing the income gap

It is hard to attribute exact numbers stating which measures led to which reduction in

income inequality, but the trend discussed in the first part of the paper clearly shows that

income inequality is decreasing steadily in Venezuela. That should not come as a big

surprise, since the mechanisms behind such a decline are quite logical. Land distribution

provides the former landless, who were amongst the nation’s poorest, with a source of

income. Naturally, their position betters and the gap between them and the richest

people will narrow. The same measure will have the opposite effect on large-scale

farmers who now have lost some of their land and the income associated with that. This

will also contribute to the narrowing of the gap.

Investing heavily in education and health care provides the poorer parts of society

to better their position, since they now have access to a better education and most likely

also better (and better paying) career possibilities that come along with that improved

level of education. The health care system gives them a chance to remain healthier for

longer periods of time, and therefore the possibility to be more productive at their work,

and lessens the chance of them loosing income because of serious ailments. For these

measures to have significantly measurable effects, it is widely believed that a delay of

several years will have to be taken into account (which makes sense, since e.g. the

education will take several years to fulfil, or it can take several years to get an effective

health care system going).

Income inequality before taxes, or pure wage inequality, will go down because of

the mechanisms described above. But inequality in spendable income will also be reduced

by some of the policies of the Chavez regime. Per capita spending on public goods will go

down, since many of them are provided free of charge through the “misiones.” Since

health care and education will take less of a strain on income, more money will be left to

spend on other things such as housing and food. So these measures provide the

Venezuelans with a little more purchasing power. And it can de deducted that the lower

income households profit more from these measures than the higher income ones, since

the higher income households will often times use less of these public goods and turn to

private alternatives instead. Private schools and private hospitals still have the

preference of the richest inhabitants of the country, and they are willing to cough up the

money to use them. This means the “misiones” will mainly benefit the people for whom

they were meant in the first place: the poorer part of the population. (Penford-Becerra

2006, 17)

Long term: oil, debts and reputationUndoubtedly, Venezuela stands to benefit economically from its better educated and

healthier population, and the gap between rich and poor can be narrowed over the next

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decades by these measures. But can Venezuela really afford to keep these measures at

the current level of cost for that long? The whole system seems to be somewhat of a

house of cards, of which the stability relies almost entirely on the revenues of the oil

industry.

The main sources of money for the social programs are derived from the oil

industry. This financing takes place both via taxation and by the mandatory contributions

to Fonden. In order for this system to work in the future, it is very important that oil

revenues remain as high as they have been over the last decade. This means that the

price of oil should remain somewhat constant (and high) and that Venezuela must not

run out of oil. It also means that something similar to the 2002 oil-industry strike cannot

happen again, since this will cause great economic damage and will make the cart house

tremble. How likely are these assumptions?

The likelihood of another strike is the easiest of these dangers to be addressed by

the Chavez administration. Right after the strike, almost the entire upper management of

PDVSA was fired and replaced by people who were seen as more obedient to the

government. But the threats posed by the oil price and the oil reserves remain. Oil prices

have been very high over the last decade, but are also known to be highly susceptible to

price shocks, as all natural resources tend to be. Venezuela seeks to counter this

volatility through its membership in OPEC, but even OPEC cannot completely rule out the

possibility of price shocks. And then there is the possibility of oil prices going down

permanently. The fear for reliance on oil from disreputable regimes and the switch to

more sustainable forms of energy sources can mean that oil is no longer the energy

source of the future. Sure, if this happens it can take decades. But what will happen to

Venezuela’s economy then? And what will provide financing for the redistribution policies

then?

Then there is the issue of how long the oil reserves will last. Since its supply of

technically retrievable oil has recently been set at 513 billion barrels and current

exploitation is over 2.3 billion barrels per day, it seems that Venezuela can easily

produce oil for decades and decades to come. (BBC website 2010) Yet this is not

completely true, since ‘technologically retrievable’ is not the same as profitably

retrievable. The cost of for instance retrieving oil at very large depths or pushing it out of

sand (which is the form in which much of Venezuela’s oil is), are so high that at current

oil prices, that is simply not worth the effort in an economic sense. So unless the oil price

goes up steeply in the future, it is likely that the oil will dry out at some time (the

shortest estimate is within 20 years), and with the current make up the Venezuelan

economy is not diversified enough to absorb this loss of income. Of course, the land

redistributions aim at diversifying it somewhat towards agriculture, but the lump sum of

all income is still derived from the oil industry. Venezuela can now live comfortably from

its oil industry, but this cannot go on forever. It can then not afford to keep the

distribution schemes going on. And the reserves of Fonden, as stated in the previous part

somewhere between 14 and 16 billion dollars, provides only enough for one or two years

of redistribution at the current spending rate.

And the financing of the redistribution come at another cost. The nationalisation of

oil fields and the redistribution of land has made Venezuela a less attractive country to

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invest in, since investors have to take into account that their possessions (investments,

land, companies) can be subject of state confiscation as well – as has been the case with

foreign exploited oil fields that are now nationalised for at least 60 per cent. (Bureau of

Economic, Energy and Business Affairs 2009, US State Department Website) Venezuela

might miss out on foreign investment due to its reputation and the fear of

nationalisation. These measures have also been the reason for many members of the

former Venezuelan elite to leave the country and taking their possessions with them and

the main cause for political and societal tensions between different groups in the

population, as explained in the previous part of this paper.

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Conclusion

Development is a process of several decades, if not more, and the end results of

Chavez’s redistribution policies can therefore not possibly be known completely at this

point. It is however fair to say that these measures have had significant positive effects

in the lives of millions of poor Venezuelans. They have not only seen improvement in

their absolute position, being able to provide better for themselves, receive higher

incomes and have better access to many important public goods such as health care and

education, but also in their relative position. The gap between rich and poor has been

closing constantly over the past few years, not only when measured in Gini coefficients

but also when viewed as percentage of income over quintiles of the Venezuelan

population.

These improvements in the situation of the country’s poor are far from complete.

Venezuela still suffers from severe poverty for a large part of its people and the gap

between the country’s richest and poorest is still wide in comparison to average

numbers. Whether the governments policies can and will continue to provide

improvement largely depends on the costs of these measures. And as this paper has

attempted to asses, these costs are high. The policies of redistribution are not only

expensive in an economic sense, but are also causing political tensions and damage to

the countries reputation – especially the nationalisation and confiscation of land. These

tensions and the constant threat of nationalisation makes Venezuela less attractive as an

investment basis, which is also holding the country back in diversifying its economy.

The complete reliance on oil revenues to finance the redistribution measures,

especially the social programs, provides a real threat to this system. Venezuela’s oil

reserves are not endless, and when they do end, the country faces a real problem, both

in financing these programs and in paying off its debts. The same goes for sharp declines

in oil prices. Oil prices are volatile, and therefore so are oil revenues. A significant decline

in price over a longer period of time, a permanent decline in the price of oil if it becomes

substituted with other forms of energy sources, or even something akin to the massive

oil-strike of 2002 will seriously endanger the government’s ability to finance these

projects.

So to answer its main question, to what extent can the Venezuelan redistribution

policies to counter the effects of domestic income inequality between 1998 and now be

considered effective?, this paper argues that the redistribution measures taken by the

Chavez regime have been effective at improving the lives of the countries poorest and at

narrowing the gap between the richest and the poorest parts of the populations up to

now. It has done so by providing income through land and cooperative jobs as well as

access to better education and a better health via the “misiones” and more affordable

food via the state markets. It remains very doubtful whether Venezuela can maintain this

project of equality through social expenditure over a longer period, since it is mainly

financed by rent-seeking behaviour that depends on its oil revenues and these projects

cause unrest not only between the government and the national elite, but also for

international investors that have to calculate the risk of possible nationalisation of their

businesses and their land.

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Can Venezuela provide the blueprint for development and equality that Chavez’s

admirers in the Latin American region so desperately seek? Only if they have the same

access to a readily available source of national income and are also willing to risk

scorning their own elite and their reputation as a provider for a safe investment climate.

They too would have to nationalize their entire natural resource industries and set up a

wide system of state-led redistribution. And just as the case is for Venezuela, the

durability of such bold measures for the long term remain questionable at best.

15

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Accessed on June 27th 2011.

Chavez teaching children in a public school in Maturin, Reuters (2007),

as found on . http://www.economist.com/node/14258760?Story_ID=E1_TQNVRSGD.

Accessed on June 27th 2011.