Chávezonomics

This week’s announcement by the Venezuelan government that they were going to devalue their currency gives me an excuse to talk about that darling of the left Hugo Chavez. I am normally sceptical about anyone who let-wing journalists fawn over so much but Chávez is undoubtedly an intriguing character. The right too seem to be obsessed with him. The conservative Heritage Foundation ranked Chávez’s Venezuela 183rd out of 187 in terms of authoritarian governments in the world. He has had 19 elections in 11 years. This is not Cuba. Thousands of people regularly take to the streets to protest against Chávez and people go on television calling him a dictator. Again, this is not something that goes on in Cuba. There is more to democracy than holding elections but Chávez clearly does enjoy considerable support in his country. However, in this post I want to look at Chávez’s economic policies.

In relation to this of course we have to refer to the recent devaluation or adjustment of the bolivar. This is a two-tier devaluation; it devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar, which had been in place since 2005. The measure represents a 17 percent and 100 percent devaluation respectively. His claim that there was absolutely no reason for anybody to be raising prices of absolutely anything did strike me as a little bizarre. I may be an armchair economist but if you devalue a currency then it is worth less and logically prices will have to go up. Am I missing something here? Chávez has the gift of the gab and went on in true populist style:

I want the national guard on the streets with the people to fight against speculation. Publicly denounce the speculator and we will intervene in any business of any size.” Chávez, unlike the vast majority of economists, believes in price controls. They sound wonderful but as economist Thomas Sowell always says about a particular policy, you have to ask a very simple question: And then what? Unfortunately history shows that they do not work. The Roman emperor Diocletian introduced price controls, which resulted in a decline in supply, which combined with the increased demand led to massive shortages. These shortages led the emperor to denounce the hoarding of food. This is exactly the kind of demagoguery which Chávez also likes to engage in; political leaders can always find someone else to blame for the bad consequences of their own policies.

Chávez was for a number of years the beneficiary of the oil boom. This gave Venezuela a huge windfall, and Chávez was able to redistribute that money. But for many analysts oil can be a mixed blessing. This is known as the curse of oil wealth. Venezuela has been producing oil since 1928 and was one of prime movers in the founding of OPEC in the 1960s The petroleum sector dominates the economy, accounting for approximately a third of GDP, around 80% of export earnings, and more than half of government operating revenues. OPEC co-founder Juan Pablo Perez Alfonzo predicted in the 1970s, “oil will bring us ruin.” He called it “the devil’s excrement.” This may seem paradoxical but there are numerous examples around the world – Saudi Arabia Nigeria and Russia are obvious examples. There are a number of reasons for this. One idea that I find particularly interesting is that when a country is not resource-dependent, its governments have to tax citizens, who demand efficient and responsive government in return. This relationship is broken in resource-rich countries, where the money goes directly to the government, which is not responsive to their needs.  Countries whose economies are dominated by resource extraction industries can often be more repressive, corrupt and badly-managed. Many of Chávez’s predecessors have fitted this description perfectly.

Chávez also likes his nationalisations. The underlying assumption here is that foreign investment is by its very nature exploitative. But if you look at the reality many of the poorest places in the world are those which do not receive Western investment. The vast majority of money is actually invested in the western countries. Very little is invested in Africa because investors are afraid of not getting their money back. By nationalising many sectors Chávez is sending a message. Who would really want to invest in a country like this, when at any moment you could have your assets seized? Business needs a stable climate to thrive.

The best judge of Chávezonomics of course will be time. The whole question of how nations become prosperous is complicated. China has become rich ignoring many of the prescriptions suggested by the West and with little inclination for democratic freedoms. However I don’t feel that Chávez has any real economic solutions. What he has had so far is all that oil money, which he has been very adept at spreading around; his populist policies have played well with the Venezuelan electorate so far. But he seems to have no idea of how wealth is actually created. The rest of the Venezuelan economy seems to be in a pretty sorry state. Inflation stands at more than 25%. The next few years are going to test the value of Chávez’s “Socialism for the 21st Century.  I think many will be disappointed by the outcome.

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