The Venezuelan Story: Revisiting the Conventional Wisdom

Moisés Naím / Carnegie Endowment for International Peace

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil…."
- John Maynard Keynes. The General Theory of Employment, Interest, and Money, London: 1936.

It has become something of a cliché to use the rise to power of Venezuelan President Hugo Chávez as evidence of a brewing backlash against globalization, American-style capitalism, corruption and poverty. His fiery anti-globalization rhetoric, his strong alliance with Fidel Castro, his outreach to Saddam Hussein and Muammar Ghaddafi, his anti-Americanism and his sympathetic overtures to Colombia's guerrilla's and other insurgent groups in Latin America have all captured the world's attention.2 The popularity among Venezuelan voters of Chávez's anti-corruption, anti-globalization message is seen as the concrete manifestation of a popular sentiment that echoes worldwide.

To many, the case of Venezuela also epitomizes the popular reaction to the prolonged, exclusionary concentration of power among a small oligarchy of corrupt politicians and their business allies. Mostly, however, the situation in Venezuela is cited as an early warning signal of a worldwide backlash against the political ideas, economic policies and international relations that dominated the 1990s, namely liberal democracy, market reforms and globalization.

Yet, a closer look at the Venezuelan case unveils a rather different set of lessons. For starters, in contrast to the common wisdom, the country has suffered from insufficient integration with the rest of the world. Venezuela's problem is not too much globalization but too little. Similarly, its current economic woes and social deterioration are not the consequence of market reforms but of the failure to reform its economy. Moreover, the disappearance of the party system that dominated Venezuelan politics for more than four decades was not a sudden, Soviet-like collapse resulting from an excessive concentration of power in the hands of a small clique of politicians. Rather, it occurred as a consequence of the decentralization of political and economic power that began in the late 1980s. Chávez's ascendancy owes more to the long term dilution of the political power once held by Acción Democrática (AD) and COPEI, the two main political parties, than to their excessive concentration of power during the 1990s. Also, while corruption was and still is rampant and represents an almost insurmountable obstacle for progress, the country and especially the poor have paid a steep price for the national obsession with the need to eradicate it. The idea of corruption is as much of a constraint on Venezuela's development as corruption is itself. Finally, in sharp contrast to Chávez's rhetoric and the perceptions of some foreign observers, the policies of his administration have deeply worsened social conditions, especially for the poor. The probability that the Chávez era will result in more prosperity and freedom for Venezuela's poor is low. The Chávez administration's failure to deliver on its promises of a better life for the majority is bound to create political instability that could lead to the erosion of civil liberties.
 

A country ravaged by poverty and rocked by political instability does not provide the best base from which to launch a political message that would be readily adopted by others abroad. Unfortunately, history shows that economic failure and political repression have not always been obstacles to the international popularity of the regimes that produce them. Thus, while unlikely, it is not impossible that Chávez's ideas and approach will become a model for politicians around the world anxiously seeking an alternative to the socioeconomic model that became the standard in the 1990s.

Misreading Venezuela
One of the reasons why the Venezuelan experience has been so frequently misread is that, for decades, Venezuela was too boring in the eyes of international analysts. Foreign academics and journalists interested in the politics and economics of underdevelopment did not see in Venezuela the sort of intellectual challenges that make reputations and boost careers3. Indeed, Venezuela's stability paled before the cataclysmic changes afflicting the rest of Latin America. While wars raged in Central America, Venezuela was completely at peace. While military dictators throughout the region stifled freedoms and "disappeared" their opponents, Venezuela held peaceful, competitive and fair elections every five years, with the opposition actually replacing the party in government. While hyperinflation, high unemployment and irresponsible economic management were the norm in most of Latin America, the oil-fueled Venezuelan economy seemed to be immune to the economic catastrophes that beset its neighbors. While the unimaginable poverty and hopelessness common in the region inspired countless novels, doctoral dissertations and journalistic dispatches, even the Venezuelan poor seemed to be better off than their Latin American counterparts.

It was not until the 1990s that Venezuela suddenly became interesting. The decade saw a major attempt at market reforms, unprecedented street riots, repeated military coup attempts, the impeachment and jailing of an elected president and the indictment and exile of a former one. It also saw one of the world's costliest banking crises, the meteoric rise to power of former coupster Lt. Col. Hugo Chávez, and the adoption of a new constitution.

More significantly, the two political parties that were the building blocks of Venezuelan democracy for more than five decades lost almost all of their influence, as did the country's business, labor, and intellectual elites. Simultaneously, a new set of hitherto unknown political actors and unprecedented rules of the game emerged. Elections and referenda proliferated, yet thanks to President Chávez's extraordinary popularity at the polls and the collapse of the opposition, Venezuela began the twenty-first century with the highest concentration of power in four decades. The executive, the legislative, the judiciary and most state and local governments, the central bank and the oil industry (which provides more than 80 percent of the country's exports), have lost all autonomy and are under the direct and active control of the President. Through a national referendum in late 2000, President Chávez won the authority to reorganize the Confederación de Trabajadores de Venezuela (CTV), the traditional labor unions' body, and oust its leaders in the hope of replacing them with some of his allies. The military has gained unprecedented influence, with officers occupying the most critical positions in government. Military instruction is now an obligatory subject in all high schools and history textbooks are being rewritten. Internationally, Cuba has now replaced the United States as the closest ally of the Venezuelan government and saber rattling aimed at the neighboring governments of Colombia and Guyana is a common occurrence.
 

In the late 1990s, Venezuela had another first: a massive exodus. Prior to then, in contrast to most other Latin American and Caribbean countries, Venezuela had not experienced any substantial emigration. Beginning in the second half of the 1990s, an unprecedented proportion of the middle class sought refuge abroad from a crime rate that had doubled since 1990, making Venezuela the world's sixth most violent country and with an economic despair so deep that it swallowed even the huge financial windfall generated by high oil prices. Fittingly, the decade even brought with it a new name for the country, now known as The Bolivarian Republic of Venezuela, as stipulated by the new Constitution approved in 1999.

The Venezuelan story: the common wisdom

A common description of Venezuela's path to its deeply troubled present runs along the following lines: Venezuela is one of the wealthiest countries among emerging markets, a country blessed with all kinds of riches - most notably, huge petroleum reserves. This national wealth could have generated a richer population and an advanced economy and society. Instead, a small elite managed to grab most of the country's wealth. This concentration of political and economic power resulted in a country with abominable poverty and outrageous inequality. The situation was further complicated by the imposition in the early 1990s of market reforms that benefited the private sector and foreign investors at the expense of the poor. Not only were these reforms undertaken without consulting the Venezuelan people, but they were imposed from above by the government of Carlos Andrés Pérez in connivance with the IMF, the World Bank and the United States. The neoliberal model came with its customary lethal dose of fiscal austerity measures, which forced cuts in public budgets and subsidies that benefited the poor. It also led to large-scale privatization that transferred prized national assets to foreigners who then proceeded to eliminate thousands of jobs, and to the liberalization of trade and foreign investment which made the country more vulnerable to the vagaries of the international markets and globalization. The combination of corruption, financial deregulation and globalization created the conditions for the banking crisis that hit the country in the mid-1990s. Again, this crisis hurt the middle class and the poor while enriching corrupt bankers who then fled the country with their bounty.
 

Even before the banking crash, however, the Venezuelan people had already taken to the streets in protest. In 1989, the country witnessed the worst street riots in decades, with people protesting against the neoliberal reforms that while may have reflected the Washington Consensus, were very far from enjoying a consensus among Venezuelans. This widespread popular discontent was capitalized on by then Lt. Col. Hugo Chávez, who together with three other fellow officers led a coup against President Carlos Andrés Pérez. Although the coup failed, it engendered a political upheaval that eventually led to the democratic election of Chávez in 1998. He won the presidency with the enthusiastic support of the majority of voters who were fed up with the brand of corrupt democracy epitomized by Acción Democrática and COPEI, neoliberal reforms that only benefited the wealthy and the rampant poverty unjustifiable in a country so rich.

What's wrong with this picture?

It is true that Venezuela is a country with widespread poverty and profound inequities, governed for too long by inept and corrupt politicians who looted the country's riches in cahoots with greedy and equally corrupt economic elites. But that is not the whole story. A closer examination of the assertions commonly used to explain Venezuela's present plight and the factors that caused it reveal a somewhat different picture.

Venezuela is a rich country
According to a survey conducted in August 2000, about 90 percent of Venezuelans believe this assertion. In fact, 82 percent believe that Venezuela is "the richest country in the world". It is also an assertion made in almost everything that is written about Venezuela and a permanent feature in the national discourse. The specific reference, of course, is to the country's oil wealth and its mineral potential. The reality, however, is that despite occasional and short-lived windfalls from oil revenues, the secular decline in the income from oil combined with the booming needs of a growing population and the failure to develop other economic activities, have long made Venezuela's oil insufficient to make it a rich country. In 1974, oil contributed $1,540 per person to the government and represented more than 80 percent of total government revenues. Twenty years later it contributed just $200 per person and accounted for less than 40 percent of total fiscal revenues. In the last two decades, poverty not wealth, has been the country's defining characteristic. Today, 68 percent of Venezuelans live below the poverty line. No other country in Latin America, with the exception of Chile under Allende in the early 1970's and again under Pinochet in 1982, has experienced a greater and more rapid increase in poverty than Venezuela9. In the past 20 years, critical poverty has increased threefold and poverty in general has more than doubled. Since 1980, in Latin America only Nicaragua, Haiti and Guyana have experienced a worse economic performance than Venezuela. Thirty years ago Venezuela's per capita income was higher than that of Japan and 20 years ago, it was roughly that of Spain. Until 1980, Venezuela was the world's fastest growing economy in the 20th century. Today, its income per capita in real terms is at the same level it was in 1962. Unemployment is at 15 percent and 45 percent of all jobs are provided by the informal economy. Real wages are 70 percent below what they were in 1980. The private sector has also shrunk. Tens of thousands of small and medium-sized enterprises have gone out of business while the majority of the once mighty economic groups have either disappeared or survive at a fraction of their former size. State-owned enterprises in sectors where the country is purported to have some competitive advantage -- like steel, aluminum or petrochemicals -- either survive due to huge government subsidies or make a negligible contribution to the country's income or employment. Venezuela lacks the human and physical infrastructure to make it a rich country and its oil and mineral wealth have proven to be more of an obstruction than an advantage in creating the conditions that would lead it into a more stable, prosperous future. Venezuela's experience is an unequivocal confirmation of the general rule that the abundance of natural resources induces parasitism and stifles development. It also confirms the assertion of Uruguayan writer Eduardo Galeano, who noted that "Latin America's poverty is due to its great wealth in natural resources" Yet the politically explosive reality is that 90 percent of Venezuelans continue to think that they live in a rich country.

Corruption is the main cause of Venezuela's social and economic problems.

This belief too, is deeply held by a large majority of Venezuelans. If the country is rich and its wealth belongs to the state but the population is poor, then somebody must have stolen that wealth. That "somebody" is obviously "the politicians" and " the rich" Thus, corruption becomes the central theme in the national psyche, and mistrust in government is a pervasive, and often justified attitude. The corollary is the belief that a small elite has unduly appropriated the country's wealth at the expense of the poor. Thus the mantra --- tirelessly repeated, seldom scrutinized and deeply ingrained -- is that in Venezuela, corruption is the main, if not the only roadblock to prosperity. Once corruption is eliminated, the popular expectation goes, the wealth that after all is already there, will spread almost instantaneously and effortlessly throughout society. For years, politicians, the media and the educational system have fed and amplified this expectation. Thus, the eradication of corruption has become Venezuela's single most important political promise, policy goal and developmental strategy. Meanwhile, corruption has become pandemic in part thanks to policies that stimulate it by relying on the discretion of largely unaccountable government officials and the enormous role of the state. Paradoxically, the national obsession with corruption has also made it more socially accepted because of the assumption that "everybody is doing it" and impunity reigns. Also, corruption is often justified as the only means of appropriating one's legitimate portion of the country's wealth, a portion that would be stolen by others anyway. For some, corruption is either the quickest and safest way to make a fortune and for many, it is the only way to make ends meet. Not surprisingly, moral condemnation of corruption has utterly failed to curb it. Yet even after decades of failure, such condemnation continues to be the only tool the country's leaders and voters seem to have in mind for dealing with it.

The belief that corruption is the main culprit behind the country's woes, is at the core of Venezuela's political and economic instability. The national debate about poverty alleviation is reduced to one centered on corruption eradication with scant attention paid to the policies and institutions needed to create new wealth or improve the country's performance. Moral condemnation and promises of ethical behavior find more support and are more readily accepted than any legitimate policy proposals. The perception of honesty becomes the only relevant credential in the recruitment and appointment of leaders; presumed honesty overrides any concerns about lack of qualifications or technical competence in the appointment of government officials. Proposals to create new wealth or reform policies that stimulate corruption are seldom advanced or simply overwhelmed by the anticorruption crusade.

For example, during his second administration in the mid-1990s, Rafael Caldera appointed a "Presidential Commission to Combat Corruption" without however, giving it much power or resources and after several years of activity, ceased to function having achieved very little. President Caldera also insisted on making corruption the central theme of the 1997 Ibero-American Summit hosted by Venezuela despite the reluctance of other heads of state who were more interested in discussing initiatives to further trade, investment and economic integration among their countries. Yet alongside his anticorruption campaign, Caldera reinstated price controls, foreign-exchange controls and a variety of other government initiatives which obviously encouraged corruption. His administration was also particularly ineffectual in bringing to justice the many regulators and bankers responsible for the country's massive banking crisis. Despite Caldera's repeated promises not to let a single act of corruption go unpunished and his constant homilies about clean government, during his term corruption was common and impunity continued to reign.

The reality is that while corruption undoubtedly was and continues to be an important determinant of Venezuela's poverty and inequality, the fundamental causes of its dismal socioeconomic performance lie elsewhere. Wrong policies, woefully incompetent institutions, adverse international circumstances, incompetent leadership, and the noxious effects of being an oil economy and society have played a far more important role than corruption. True, many of the wrong policies, poor institutions and nefarious leadership were either determined or sustained by corruption. Yet corruption is a symptom, not a cause of the country's problems. In the last 20 years, the single-minded focus on fighting corruption has either undermined or altogether blocked efforts aimed at reforming policies and institutions, adapting to changing international circumstances, or breaking the vicious circles that have hindered the country's politics. In the same way that economic dominance of oil stifled the development of other industries, the dominance of the corruption issue in the national debate has stifled the development and emergence of ideas about how to deal with the country's more pervasive problems.

Venezuela's turmoil is the consequence of the excessive concentration of power by traditional elites

Excessive concentration of political and economic power was certainly a problem in Venezuela's past. Yet in part as a reaction to such concentration and the incompetence of those who held this power, the opposite was true during the late 1980s and most of the 1990s.

In reality, the proliferation of new centers of power especially at the local level, the growing influence of civic organizations and neighborhood associations, the disappearance of party discipline, the weakening and even the disappearance of politically influential business groups and organized labor, and the balkanization of politics were all characteristics of Venezuela in the 1990s. Instability, gridlock and the incapacity to react to new domestic and international realities, resulted from having too many weak political actors, rather than too few powerful ones.

The demise of Venezuela's two-party system was largely due to the inability of party leaders to react adequately to the changes brought about by the end of the Cold War, low oil prices and by the process of political decentralization that began in 1989. Acción Democrática and COPEI once seemed invincible and used and abused their power without compunction. Their large political base, widespread national organization and party discipline with which the members of each party responded to the designs of the leadership, made them powerful electoral machines. The glue that provided party cohesion was not ideology but the promise of government favors and jobs. The basic and often only mechanism used by the parties' leadership to ensure their members' discipline was their ability to regulate access to the resources of the state, rather than membership loyalty or doctrinaire commitment to the party line. Once in government, the leaders and public officials of Acción Democrática and COPEI managed the country by simply relying on the income from oil, their electoral dominance and the geopolitical certitudes created by the superpower rivalry. Eventually however, oil revenues dipped and the country found itself heavily indebted. While the end of the Cold War and globalization changed the international landscape, urbanization, immigration from neighboring countries and demographic change altered the domestic landscape. Moreover, in 1989 direct elections were instituted for state governors, mayors, and all local authorities that had hitherto been unilaterally appointed by the President and the party in power. Thus after the 1980s, the parties found themselves with less oil money to disburse, mounting demands for social services and physical infrastructure while chronic fiscal crises forced shrinkage in public expenditures. Acción Democrática and COPEI also had to contend with long recessions, inflation, currency devaluations, unemployment, capital flight and the banking crises that replaced the economic stability and the steady, rapid growth to which the country had been accustomed to16. In addition, political devolution ensured that the reputations and personal charisma of the candidates to state and local governments mattered more than the party's support. Under this new political dynamic, pleasing local voters became far more important than pleasing party elders who had already lost influence as a result of the fiscal crises that cut back their ability to support candidates or reward party loyalty. Most importantly, Acción Democrática and COPEI faced a furious electorate, nostalgic for a more prosperous past and fed up with unfilled promises and constantly deteriorating social conditions.

While many descriptions of Venezuelan politics in the 1990s characterize it as a period when the two parties held a tight grip on power, in reality, the decade saw massive electoral volatility with voters taking advantage of any and all opportunities to punish those in power, regardless of party affiliation17. Until the late 1990s when Hugo Chávez was elected, governments with weak mandates had to deal with profound economic crises, mounting civil disorder, two failed military coups, fractious politics and the proliferation of new centers of political power as popular governors and mayors bid for national recognition and influence18. Thus what for almost half a century had been an indispensable requirement to win almost any election in Venezuela, namely the support of Acción Democrática or COPEI, became a political scarlet letter in the 1990s. Even Rafael Caldera the founder and leader of COPEI, abandoned his party in order to run and win the Presidency for the second time in 1994, supported by many of the small leftist groups against which he had battled all his life.

Neoliberal economic reforms and their harsh social costs wrought havoc in Venezuelan politics and society.

The problem with this argument is that while every successive government since the early 1980s has tried its hand at some kind of economic reform, none have been able to sustain it. As Javier Corrales has noted, Venezuela has experimented with heterodox stabilization (1985-1988), shock therapy (1989-1992), gradualism (1996-1998), reforms by executive "special powers" (early 1980s, 1993-1994, 1998), reforms by negotiations with opposition parties (1996-1998), stabilization through price controls (late 1980s and 1994-1996), deep trade liberalization (1989-1993), concessions to the economic losers from trade liberalization (1994-1998) and direct subsidies to vulnerable social sectors (1990-1992). Policy experiments were usually abandoned before they could be fully implemented or suffered from substantial distortions in the implementation process. Economic reforms were consistently derailed by governments unable to shield them from the country's balkanized, predatory politics, by incompetent and corrupt implementing institutions, or by unexpected increases in oil prices that canceled any appetite for reform. Not surprisingly, the Interamerican Development Bank classifies Venezuela in the group of "slow reformers" among all nations in Latin America and the Caribbean. This reality was never an obstacle for politicians who ran on electoral platforms whose essential message was the intolerable social consequences of economic reforms.

Both Rafael Caldera (1994-1999) and Hugo Chávez made intensive use in their victorious electoral campaigns of scathing condemnations of the "savage capitalism" unleashed on the poor by the neoliberal reforms imposed by Washington. As it has been amply documented, the Venezuelan experiment with neoliberal reforms was modest, short-lived, clumsily executed and often reversed. Despite the political destabilization they triggered, Venezuela's reforms fell far short of the country's needs and of what most other countries in Latin America implemented during the 1990s.

Venezuela's tax system, labor and social security laws, health, education and housing, state-owned enterprises including the oil and petrochemical industry, agriculture and almost all of its public sector institutions, as well as most regulatory frameworks, are in desperate need of reform and modernization. The country -- especially its poor -- are victims of a decade of political gridlock and narrow national debates that have made reform impossible.

Venezuela is a victim of globalization

If globalization is defined by the number, variety and intensity of the links that a country has with the rest of the world, then in the 1990s, the globalization of Venezuela's economy and society was neither rapid nor intense. In fact, it lagged behind that of other large Latin American countries and even smaller ones like Chile or the Dominican Republic. Despite the huge volume of its international oil trade, Venezuela ranks only 36th in the A.T. Kearney/Foreign Policy Magazine Globalization Index, which classifies a sample of 50 countries according to their degree of interaction with the rest of the world. Globalization may not be the solution to the country's many ills but today's Venezuela has experienced too little of it for it to be a major problem.

The production and exportation of oil and the international financial flows associated with it have always constituted the most powerful link between Venezuela and the rest of the world. That link retained its importance in the 1990s, a decade that also brought with it new foreign investors in telecommunications, banking and energy. The decade also saw a surge of trade and investment with Colombia as well as the emergence of a Venezuelan diaspora abroad, creating a new type of international linkage, mostly in the form of remittances. But these new international links were few, weak and insufficient to compensate for the decline or stagnation of other forms of international integration. The number of Venezuelans studying abroad declined precipitously. In 1982, there were 15,000 Venezuelan university students studying in the United States alone; by 1999, that number had dropped to 5,133.

Many multinational corporations closed or shrank their Venezuelan subsidiaries, new foreign investment in sectors other than energy and banking was very limited, and the number of foreign tourists plummeted in the second half of the 1990s. Aruba, a tiny island of the coast of Venezuela, attracts more than 1 million tourists each year, the Dominican Republic more than 2 million and Mexico more than 17 million. However, only 300,000 tourists visited Venezuela in 1999 and 2000. Venezuela ranks 36th among 50 countries in terms of foreign portfolio investment, with total flows accounting for slightly over one percent of GDP in the last five years.