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ECONOMIC DEVELOPMENT
cided to finance an unprecedented boom in private consumption through expansionary macroeconomic policies. Ever-expanding fiscal spending was coupled with interest rate, price, and exchange controls, as well as general subsidies and massive cash transfers to the poor. They supplemented this mix with left-wing revolutionary rhetoric, a systematic dismantling of checks and balances on executive power, and aggressive administrative, legislative, and judicial actions against private property, media outlets, and opposition leaders.
Abstract ALTHOUGH IT IS too soon to assess late Venezuelan President Hugo Chavez’s political legacy, we argue that taking an economic perspective allows for three important conclusions to emerge: (1) his rise to power can be largely explained by the abysmal economic performance of his predecessors; (2) the consolidation of his rule is partly the result of spectacular increases in private consumption generated by wildly expansionary policies in the context of price and exchange rate controls; and (3) Chavez passed away leaving his political heir holding the bag of financial excess and his countrymen at large the much heavier legacy of paying the price of his political success.
Year after year, the administration of Venezuelan President Hugo Chavez managed to survive the ominous predictions of mainstream economists as domestic and external constrains kept pushing forward. The figures are quite revealing. Between 2005 and 2012, the compounded annual growth rate of oil exports was 14 percent and that of the stock of foreign debt was 16.8 percent. 1 They both allowed the value of imports to grow 17.4 percent and real Introduction One could say that they painted themselves into a corner. Buttressed by the largest and most prolonged run in oil prices in Venezuelan history, the country rulers de-
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The Economic Legacy of Hugo Chavez government spending another 9.1 percent. 2 While real gross domestic product (GDP) per person grew only 3.1 percent and real wages fell 0.2 percent, private consumption per head increased 5.6 percent. Poverty rates dropped from 53.9 to 25.4 percent, extreme poverty from 22.5 to 7.1 percent, and the Gini coefficient of inequality fell from 0.46 to 0.39. These results would prove instrumental to the government’s phenomenal success at the polls (see Appendix I and II). 3 2012, making it the second most violent country in the world and Caracas the sixth most dangerous city on the planet. 4 Public infrastructure is also a big problem: the overall quality of life and the country’s competitiveness have been affected by the congested and outdated state of the nation’s network of roads, ports, airports, electricity, water, and sewage systems, among others. Institutions are crumbling as well: Venezuela ranks 134 out of 148 countries in the 2013-2014 World Economic Forum’s Global Competitiveness Report and 180 out of 185 in the 2012 Doing Business index. Out of the 214 countries included in the World Bank’s 2011 Worldwide Governance Indicators, Venezuela ranks 162 in voice and accountability, 191 in political stability and absence of violence, 184 in government effectiveness, 196 in control of corruption, and 211 (fourth to last) in rule of law.
By October 2012, however, expansionary policies had reached their limits. The recipe was simply not sustainable. When oil prices stumbled as a result of the 2008 financial crisis, the authorities decided to finance their way through, a strategy that continued unabated after oil prices rebounded to their precrisis levels but failed to continue their upward trend. Various sources of financing have been tapped since then: foreign public debt increased from $38 billion to $103 billion, and domestic debt went from $17billion to $39 billion between 2009 and 2012. The authorities also resorted to printing money. After growing 14 percent and 19 percent in 2009 and 2010, respectively, money supply (M2) grew 51 percent in 2011 and 60 percent in 2012, partly as a result of Central Bank loans to the national oil company, Petróleos de Venezuela, S.A (PDVSA), and to other State-owned enterprises. Finally, arrears ballooned in 2012 as other sources proved insufficient. Most of these arrears are not documented or consolidated in any report coming from official sources; estimates of their tally have to be obtained from the corresponding chambers and other private associations.
Political and Economic Background It is tempting to see Hugo Chavez and his Bolivarian Revolution as a historical mishap, a political cyclone that destroyed what not too long ago stood as one of the strongest and most successful democracies in South America. To be sure, Chavez had all the characteristics of a messianic leader. His oratory skills, charisma, and indisputable talent to stir up the base emotions of the masses made him an indispensable ingredient of any attempt to explain not only the highly controversial appeal of his Bolivarian Revolution, but more importantly, the all but absolute control of the Venezuelan State he managed to muster throughout his fourteen-year rule.
The problem with such an interpretation, however, is that it fails to take into account the fertile soil that his violent and vindictive message found when he decided to run for president in 1998, after his failed coup attempt in 1992. Had this rabblerouser tumbled into the spotlight two or three decades earlier, he would have at best In addition to these hard-pressing financial matters, Venezuela faces other significant and immediate challenges. According to public opinion polls, personal security is the most pressing concern. Intentional homicides have soared from a rate of 20 per 100,000 population in 1999 to 73 in LATIN AMERICA POLICY JOURNAL spring 2014 61
become the leader of a small political fringe group.
rible news for a country where oil earnings represent about 50 percent of government income and 90 percent of export revenues.
In the early 1970s, Venezuela was, by all accounts, the richest and most promising country in Latin America. An astonishing feat, to be sure, for a country that only fifty years before stood as one of the most backward nations in the Western Hemisphere. It was precisely at that time that a new setting of civil and political order combined with the discovery and subsequent exploitation of huge oil deposits, allowing for the possibility of channeling growing fiscal revenues into much-needed public goods and services. Although not always wisely spent, sustained increases in government spending during the next fifty years allowed Venezuela to become one of the top economic and social performers in Latin America and the world. 5 Incomes grew eightfold in per capita terms, life expectancy increased from thirty-one to sixty-five years, and literacy rates went from 32 percent to 77 percent. After 1958, the country turned itself into a model of democracy in a region marred by guerilla warfare and brutal military dictatorships.
Traditional parties, long since out of touch with the day-to-day lives of common Venezuelans, underestimated Chavez as well as the appeal of his rhetoric, paving his way to the presidency in 1998. The first five years of his rule were particularly difficult from an economic point of view, partly as a result of increasing but still relatively low oil prices and also due to the very low levels of private investment. From a political perspective, however, it was during this time that Chavez’s acute gambling instinct allowed him to induce a politically inept and arrogant opposition into a costly series of mistakes that resulted in him taking personal control of the key powers of the State: the Armed Forces after the coup attempt of 2002, PDVSA after the national strike of 2003, 20 of 22 governorships and 270 out of 337 municipalities through the opposition’s partial boycott of the regional elections of 2004, and finally, the National Assembly as a result of the boycott of the 2005 elections.
This accumulation of power in the hands of the president is without precedent in the country’s contemporary history. Between 1958 and 1998, the main political parties alternated in power in contested elections. The Parliament, the Attorney General’s office, and the Supreme Court, albeit imperfectly, did provide checks and balances on the Executive’s power. President Chavez’s will, in contrast, has become, over time, all but uncontested.
By the early 1980s, however, the magic had vanished. Between 1978 and 1998, income per head fell 20 percent in real terms, making Venezuela the worst performer in the region and sending the share of the population living under poverty from 23 percent to 57 percent. Although the causes behind such a drastic reversal of fortune are still hotly debated, an angry and frustrated population saw little more than widespread corruption in the political system behind this turn of events. Hugo Chavez could not have picked a better time to burst into the political scene. At the time of his coup attempt, the population was emerging from the adjustment phase of an International Monetary Fund (IMF)–sponsored reform package that had taken the population largely by surprise. By 1998, the country was in tatters: oil prices had plummeted below ten dollars a barrel, ter- 2005-2012: The Macroeconomics of Populism As oil prices began to increase in 2004, the administration learned quite rapidly the political benefits of stimulating private consumption. In a surprisingly faithful remake of the set of policies described by Rudiger Dornbusch and Sebastian Edwards in The Macroeconomics of Populism, the authorities decided to loosen monetary and fiscal policy; set a fixed and overvalued currency; and imposed foreign exchange, price, and interest rate controls. In order to better capitalize the political returns of the consumption boom generated by these policies, they diverted the proceeds of the oil price boom from PDVSA, the budget, and from the Central Bank into FONDEN, a newly created investment fund managed with absolute discretion by the president. 6 equipment production, pharmaceuticals, and paper. Usually this came as a result of an expropriation and in association with political allies in a given private company’s workforce, but also resulted from new ventures with political allies such as Iran, China, and Belarus. One important indicator of this policy is that between 2005 and 2012, the government share of total imports went from 17 percent to 44 percent.
The Venezuelan economy responded to this distorted set of incentives by abandoning domestic production in favor of import and consumption-related sectors. Year after year, oil price increases allowed for large increases in imports to cover for shortcomings in domestic production, thus keeping the expansion in private consumption from getting bogged down in bottlenecks.
2012: The Final Showdown Whenever his political survival has been at stake, Chavez has never been willing to leave loose ends. Back in 2006, in spite of leading the polls by a wide margin, he engineered an increase in nominal public expenditure of 51.7 percent (29.2 percent in real terms), augmenting liquidity by 61.7 percent and dollar imports by 20.1 percent. Booming oil prices and spare capacity allowed for 9.9 percent GDP growth, with real private consumption increasing 14.4 percent per capita, paving his way to a crushing victory (62.8 percent). The circumstances in 2012 were different. Six years of high public expenditure and socialism had depleted spare capacity, leading to frequent shortages in different industries that have been addressed through imports. Foreign debt had increased fourfold, leaving monetization, internal debt, and arrears as the only financing options. In the context of a close presidential race, the need to compensate for his diminished presence on the campaign trail seemed to complete the recipe for a perfect storm.
As a result of the government’s policies, significant qualitative changes in the economy also took place in terms of the share and the role of the public sector in the provision of goods and services. Starting in 2004, the government took aggressive steps toward enlarging its relative scope and size through more regulations, takeovers, and outright expropriations. Between 2004 and 2010, the government expropriated 779 private businesses. 7 The authorities took control of companies and sectors they deemed as strategic, such as oil service contractors and steel and cement production, and enlarged its presence in banking as well as in food production and distribution and retail of basic consumer goods. 8 Even in sectors where it did not possess a large share of total production, the government heightened its control by setting producer and consumer prices, wages, the size of the workforce, and import quantities. It also prohibited exports, and fixed shipment size and frequency for each destination according to estimated demand in order to prevent hoarding. The government also ventured into a wide array of industries such as automobile and farm The oil price boom that began in earnest in 2005 marks the last fiscal surplus (4.1 percent) to date. From then onward, the consolidated fiscal balance 9 has registered an expanding deficit, a tendency that deepened throughout 2009-2012 as oil prices recovered from the financial crisis to later surpass the hundred dollar per barrel barrier. This unlikely result was caused by a number of factors:
t Oil revenues measured in domestic currency plunged as the government continued to use the exchange rate as an anchor against inflation t A nationwide election held every year from 2007 to 2010 forced the government to maintain high fiscal expenditure t The exhaustion of demand-driven growth, with the industrial apparatus out of spare capacity and little investment, rendered public expenditure ever more inefficient transfer automatically to the regional and local governments ( Situado Constitucional ). 10 As the opposition regional strongholds starved, a number of funds were created to collect deviated public revenues. These funds, not subject to any mechanism for accountability, became a vehicle for discretionary public expenditure. The most prominent of these funds was FONDEN, which has received from inception to 2012 a total of US $94 billion. Accountability is almost nil, both on the uses and remaining balance. According to internal sources, FONDEN has always been administered directly by President Chavez and his immediate entourage, and questions regarding the destination of the funds or the actual balance of its holdings have never been welcomed.
The consolidated fiscal balance in 2009, 2010, and 2011—the three years prior to the presidential election—shows a deficit of 8.8 percent, 10.4 percent, and 12.6 percent of GDP, respectively (see Appendix III). The fiscal outlook by year end 2012 was even worse. None of the three factors mentioned above would change. Oil prices stabilized, and oil production and export volumes were stagnant. The government quadrupled its stock of foreign debt in six years, and sovereign risk remained above 1,000 basis points. There were only three possible ways to finance the expanding fiscal gap: (1) printing money, (2) issuing domestic debt to gather idle liquidity in the banking system, and (3) arrears.
Figures for consolidated fiscal balance, including FONDEN, Chinese Fund, Fondo Independencia , and other funds, are not public. The Ministry of Finance only provides a financial summary comprising the joint fiscal accounts of the central government and PDVSA. According to internal sources, fiscal deficit reached 13.3 percent of GDP and 18 percent of GDP in 2012 (see Appendix IV). A fiscal summary of Chavez’s last year in power follows:
t Consolidated public expenditure for 2012 is totaled at 51.2 percent t Only 52.7 percent of public expenditure is executed by the central government t The fiscal deficit is estimated at 18.0 percent of GDP t 48 percent of the financing (8.7 percent of GDP) is expected to come from Central Bank t 37 percent (6.9 percent of GDP) will come from domestic debt issues t The remaining sources are Chinese Fund (1.4 percent of GDP) and PDVSA (1.3 percent of GDP) 11 The situation was much worse than the one portrayed by official statistics. Starting in 2005, the government gradually but steadily pursued a strategy of fragmenting the fiscal accounts (revenues and expenses alike) into different pockets, draining resources from the central government budget and public scrutiny. This move was eased by the implementation of a series of increasingly complex schemes that were passed by Congress and dutifully executed by the Central Bank. The money funneled away was deemed “extraordinary income” and therefore not subject to the 20 percent earmark the central government must The Aftermath As we write these lines, Venezuela has just completed the first year of its transition post-Chavez. Under the rule of his heir, Nicolás Maduro, the country had a gloomy year. Preliminary estimates of the consolidated fiscal balance indicate that 2013 closed with a 15 percent of GDP deficit, financed by printing money and issuing domestic debt in equal shares. The monetary base grew by 71 percent, pushing consumer prices up by 56.1 percent and food prices by 80.1 percent. As the government continued to rely on price controls, shortages became rampant.
Miguel Angel Santos was the head of the Macroeconomic Policy Team for presidential candidate Henrique Capriles in the Venezuelan elections of 2012. He has more than twelve years of executive experience doing business development and corporate finance in Latin America, working for large family holdings, multinational companies, and investment banks. He is an Adjunct Professor at the Center of Finance of Instituto de Estudios Superiores en Administración (IESA) in Caracas and writes a weekly column at El Universal, Venezuela’s oldest nationwide newspaper. Angel holds two MSc degrees, in economics and finance and in specialized economic analysis, both from Universitat Pompeu Fabra, and has also earned the right to use the Chartered Financial Analyst (CFA) designation.
The parallel exchange rate depreciated by 85 percent, going from 12 units of domestic currency per dollar to 80. International reserves are roughly enough to cover four months of imports, and 90 percent of them are composed by gold reserves held at the Central Bank. The foreign exchange cash balance has been depleted, and the economy now lingers on the flow. Shortages of electricity and basic goods are rampant.
He is a currently an Edward S. Mason Fellow at the John F. Kennedy School of Government at Harvard University and a PhD in economics candidate at Universidad de Barcelona.
Ricardo Villasmil was head of Public Policy of during Henrique Capriles’ bid for the Venezuelan presidency in 2012. He is Professor of development economics at Universidad Católica Andrés Bello and of macroeconomics at the Instituto de Estudios Superiores de Administración (IESA), as well as a private strategy consultant. He is a 2014 Mason Fellow from Harvard University and holds a PhD in Economics from Texas A&M University and an MBA from IESA The authors would like to thank Ricardo Hausmann and Richard Cooper for their thoughtful comments, as well as Emily Conrad for superb editing. The usual disclaimers apply.
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APPENDIX I BASIC ECONOMIC AND SOCIAL INDICATORS 1998-2012
APPENDIX II BASIC ECONOMIC AND SOCIAL INDICATORS 1998-2012
LATIN AMERICA POLICY JOURNAL spring 2014 67 ECONOMIC DEVELOPMENT The Economic Legacy of Hugo Chavez
APPENDIX III RESTRICTED PUBLIC SECTOR – FINANCIAL SUMMARY
APPENDIX IV CONSOLIDATED NONFINANCIAL PUBLIC SECTOR
