Sunday, January 27, 2019

Venezuela - "for my friends, anything; for my enemies, the law".

Venezuela's profound political, economic, and social crises are many. Inflation is out of control, oil production is plummeting, foreign assets have been seized, there are serious shortages of food and medicine, millions are fleeing the country, and the incumbent government of Nicolas Maduro has increasingly weakened the country's democratic instruments to cling to power. How did it all come to pass? Many have latched on to a very simplistic and mistaken answer: socialism. 
It is important to realise that Chavez chose to call his transformative project "21st-century socialism", but Venezuela's economy remained market-based and private-sector dominated throughout his time in office. Though the social economy and the public sector were heavily promoted - including through nationalisation - the private sector was expected to remain dominant, and it did. A centrally planned command economy like Cuba's was neither the aim nor the reality. Oil-rich, consumerist Venezuela was the last place one would expect "socialism" to blossom. Certain statist economic policies associated with 21st-century socialism are indeed implicated in many of the economic distortions and damaging incentives ravaging the Venezuelan economy but it cannot be blamed for the authoritarianism of a Maduro regime that is now preventing the replacement of a failing government. 

The underlying causes of Venezuela's crisis are economic, relating especially to oil and the foreign currency that it brings into the country and undoubtedly connected to the 70-percent drop in oil prices in 2014 exacerbated by a series of   poor policy choices. Shortages are due largely to weak local production combined with a lack of foreign currency for imports, both of which relate to the currency mismanagement of the bolivar. 
in an attempt to prevent capital flight and currency collapse while also protecting local producers and enforcing labour law,  Chavez introduced controls on access to foreign currency. Subsidies and price controls were also implemented for many food items in order to keep them affordable to the poor, and an extremely generous subsidy on gasoline was maintained. 
But since the bolivar was overvalued, local products became less competitive abroad, whereas foreign products became cheaper at home, thereby reducing demand for national produce. This effective subsidy on purchasing dollars spurred already strong demand from those keen to avoid inflation or devaluation of the local currency. 
Many businesses and individuals were also willing to pay a premium to circumvent controls, either to avoid bureaucratic trade barriers or to safeguard the value of their capital, and a currency black market sprang up to cater for this demand. Where black-market dollars became part of the cost structure of basic goods, the profit margin between the cost of production and state-controlled prices narrowed or disappeared entirely, causing further damage to local production. Beyond undermining local businesses, these policies also created opportunities and incentives for corruption, which grew. Companies and wealthy individuals  always had the clearest means and the most capital to invest in the large-scale currency arbitrage, provoking political problems through hoarding, cutting production, or manipulating the black-market exchange rate. In Venezuela, social divisions are so deep and societal trust is so weak that the idea of a social contract, a national pulling-together is a distant dream.
The wider the gap between the official and black-market exchange rates, the greater the incentive to get hold of cheap official-rate dollars and resell them on the black market ("currency arbitrage"). The wider the gap between the prices of oil or foodstuffs in Venezuela and neighbouring countries, the greater the incentive to smuggle these products across the border for resale. Differences in price are captured privately at the state's expense while producing nothing, which in turn leaves fewer resources available for the everyday business of running the country. Finance minister Jorge Giordani resigned in protest of Maduro's mishandling of the economy, estimated that between 2003 and 2012 a truly incredible $300bn was lost to currency arbitrage alone.
In the short term, Chavez - unlike Maduro - prevented this problem from spiralling out of control by devaluing the local currency when official and black-market rates began to diverge significantly.
But in the long term, he placed his faith in a socioeconomic transformation premised on the power of a social economy that would use alternative forms of organisation, such as cooperatives and self-managed factories, to revive local production and provoke an empowering cultural shift towards active social engagement and solidarity. But massive state investment in nationalised and self- or co-managed industries bore little fruit. And even though the number of cooperatives exploded, in practice they were often as inefficient, corrupt, nepotistic, and exploitative as the private sector that they were supposed to displace. 
Chavez responded to these difficult circumstances by putting his faith in three things: himself, the military, and 21st Century Socialism. 
Faith in himself meant improvising new institutions and funding sources linked to the presidency so that he could implement his ideas immediately and without internal opposition. Faith in the military meant placing trusted "right-hand men", especially those involved in his 1992 coup attempt, in positions of institutional and financial power, as well as assigning key economic functions to the army.  
And faith in social change meant believing in the transformative power of participatory democracy and the social economy to replace the prevailing petro-state mentality of "grab what you can" and " siphon off as much oil wealth as possible for you and yours" with a more social, solidarity-based ethic. All  three had unintended consequences. Shifting political power away from the State removed meant less accountability, enabling corruption. Trusted lieutenants failed to resist temptation embezzled state resources and engaged in smuggling. Although many marginalised citizens were undoubtedly empowered and enlightened by their experience of Chavez's Bolivarian Revolution, just as many exchanged political support for state stipends. Chavez also began to use nationalisation and access to foreign currency as a means of disciplining his opposition in the private sector rather than reshaping the economy. 
This dysfunctional system passed into the hands of Maduro. Rather than allow the process of democratic politics to take its course as his administration were exposed by plummeting oil prices, Maduro blocked any path out of Venezuela's crisis, usurping the democratically elected parliament via various constitutional gerry-mandering.
The crucial role of oil in the international capitalist system makes oil-price volatility a central player in Venezuelan development. The sheer value of oil provokes the "resource curse" in undiversified economies like Venezuela's. With boom-time windfalls favouring exchange-rate shifts that make other exports uncompetitive, "petromania" leads to lavish public spending, while distorted incentives undermine ethics, entrepreneurship, and efficiency throughout the state and wider society. Venezuela's formation as a state and as a society was intimately linked to the oil industry, and this is reflected in its politics.  The effects of oil dependency extend far beyond a particular group or class. As one of the architects of Venezuela's social-economy drive puts it, the pervasive culture has always favoured "living off government transfers of oil rents instead of deservedly enjoying the fruits of productive work."

Long before Chavez took office in 1999, there were two Venezuelas: "the Venezuela that benefits from oil, and the Venezuela that remains in the shadow of the oil industry" as veteran Venezuela analyst Miguel Tinker Salas puts it.

The elite, from which the core of Venezuela's opposition emerged, rightly recognizing that Chavez wanted to end their social status that reproduced and ring-fenced their material wealth. It explains the staging of the 2002 coup even though Chavez's democratic legitimacy was not in doubt and then organising a devastating, management-led oil strike at a time when his economic policy remained more reformist than radical. By his own account, it was the sabotage and intransigence of this elite that drove Chavez towards the idea of a more radical Bolivarian Revolution in 2005.
Adapted from here 

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