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At the recent Summit of the Americas in Trinidad, two great leaders, Obama and Chavez, shook hands in what could be the symbolic first gesture of reconciliation. Treasonous neocons will no doubt rush to condemn this as yet another limp-wristed and unilateral concession to “America’s enemies”, reminding their listeners that Chavez closed down opposition media, nationalized American assets and welcomed Russian warships and strategic bombers to his realm.

Yet their stubborn animosity is worse than just imperialist arrogance – it is stupid. They fail to realize that in the past decade Latin America in general, and Venezuela in particular, has become too politically mature to be easily manipulated into serving US (corporate) interests by economic hitmen, CIA operatives and their local surrogates. It is to Obama’s credit that he is willing to move from willful denial to cautious acceptance of the decline of overt American power in Venezuela and elsewhere.

For that is the new reality. The Venezuelan opposition is increasingly discredited for its unconstructive hostility to the government and extra-legal attempts to overthrow Chavez, one of which nearly succeeded in 2002. This resulted in blowback against the US for its covert involvement The government’s refusal to renew the licenses of opposition media outlets that seditiously backed the abortive coup is thus completely understandable, as is Chavez’ personal animosity towards Bush and outreach to other states in similar straits. Furthermore, it should be noted that the owners of newly nationalized companies, including American ones, were fairly compensated.

Meanwhile, within five years of taking real power in Venezuela, a corrupt, disorganized and class-ridden country, Chavez managed to a) double the GDP, b) halve the number of people living in poverty and c) drastically improve practically every indicator of social wellbeing from child mortality rates to inequality to tertiary education enrollment rates (I already covered these successes in prior posts). This does not mean that Venezuela is no longer a corrupt, disorganized and class-ridden country – it still is, to an extent – but the improvements are undeniable and Chavez enjoys high approval ratings. It is thus unseemly and dishonest of the Western MSM to excoriate Chavez as a thuggish populist strongman and economic illiterate.

Let us hope they take a clue from Obama. Or from Mark Weisbrot and his fellow authors, who in their latest paper, The Chávez Administration at 10 Years: The Economy and Social Indicators, give a glowing verdict on the achievements of the Bolivarian revolution.

Economic Growth: As you can see from the graph below, Chavez inherited an ailing, stagnating economy. From 1978-1998, Venezuela’s per capita GDP declined by 21.5%. Chavez was initially politically weak, with the state-owned oil company (PDVSA), the linchpin of the Venezuelan economy, controlled by forces intensely hostile to Chavez. Furthermore, they began to actively sabotage the economy from December 2001, when the Venezuelan Chamber of Commerce organized a general business strike against the government. This culminated in a two day military coup in April 2002 that temporarily unseated Chavez. Adding to the political instability and capital flight, the PDVSA oil strikes of Jan-Feb 2003 led to a short but severe recession.

After the oil strike and Chavez's consolidation of power, Venezuela racked up one of the highest growth rates in the world.

After the oil strike and Chavez’s consolidation of power, Venezuela racked up one of the highest growth rates in the world.

However, once the opposition were neutralized Venezuela managed to rack up very rapid growth. Even canceling out the post-recession recovery, GDP grew at an annual pace of 8.8% from the end of the shaded part in the graph above to Q2 of 2008, or at 6.9% in per capita terms. This is not an unimpressive achievement. The (mean) average Venezuelan increased his output as fast as the average Argentine, Indian and Russian during those years; from the major countries, only the Chinese did significantly better.

Furthermore, growth was broad-based and primarily private – contrary to media myths, the oil sector actually experienced negative growth from 2005-2007 after its quick initial recovery from the PDVSA strikes. Manufacturing grew at a respectable annual rate of 13.2% from 2004-2007. For all the ruckus over incipient statism with all its negative connotations, the public share of GDP declined.

Social Progress: The economy not only grew at an impressive tempo, but the benefits accruing to it were more equitably distributed than at any time in Venezuelan history. Despite the opposition-instigated economic reversals of his mid-Presidency, from 1999-2008, poverty more than halved from 43% to 26% and extreme poverty plummeted from 17% to just 7%. Its Gini index, a standard measure of inequality, dropped from 47 to 41 – though still high, it is extraordinarily egalitarian by Latin American standards and all the more impressive considering it came at a time of rising oil prices.

Infant mortality dropped from 19.0 / 1000 in 1999 to 14.2 / 1000 in 2008; post-neonatal mortality was cut by more than half. Food security improved through the Programa Alimenticio Escolar school-feeding program and the heavily subsidized Mercal network of government food stores. Despite fairly rapid population growth, from 1999-2007 access to clean drinking water increased from 80% to 92% of the population and access to sanitation increased from 62% to 82% of the population. These achievements were facilitated by impressive improvements in medical care – the numbers of physicians, hospitals and other medical facilities increased by almost an order of magnitude.

From 1999-2008 Venezuela finally achieved near universal primary school enrollment and near universal secondary enrollment. Participation in higher education increased by an astounding 138%. Since the extra human capital embedded in education is a vital prerequisite for longterm economic growth, Chavez laid very important foundations here.

Labor: Unemployment dropped, and naysaying propagandists to the contrary, not just because the state hired all the new people. Though employment in the public sector increased by around 50% since 1999 and its share of the total workforce increased from 13.1% to 16.6%, it was commensurate with the large expansion of the state undertaken under Chavez in the second half of his Presidency. However, it remains quite low by developed-country standards.

Government Finance, Current Account. Although the dramatic rise in oil prices helped, non-oil revenue also increased from 11.7% of GDP in 1998 to 14.2% of GDP in 2007 due to improved tax collection. Revenue and spending both increased, the government maintained a stable budget surplus. However, the state oil company PDVSA also had 6.1% of GDP in public expenditures – this, along with peak oil, is probably what caused Venezuelan oil extraction to fall. That said, I think leaving more resources in the ground for a time when they’ll become worth much more is in itself not a bad investment. Similarly, the current account stayed firmly in the black throughout.

For a more detailed discussion of Venezuela’s prospects during this world depression, please see Victimized Venezuela II: Beware of Schadenfreude. Suffice to say the situation is unlikely to turn critical and Chavez will remain politically secure, the wishes of some in the US foreign policy establishment regardless.

That said, there do exist serious problems in Venezuela – inflation, an overvalued bolivar, corruption, obstacles to small and medium business (SME) growth and crime… just to prove I’m not a chavista fanatic.

Problem – Exchange Rates, Inflation. After subsiding from a peak at around the time of the PDVSA strikes, inflation crept back up to around 30% since 2006, supercharged by soaring global food prices. However, since its exchange rate is fixed at 2,150 bolivars to one US dollar, the inflation contributed to massive over-valuation of its currency, estimated at more than 50%. This needs to be fixed if Venezuelan manufacturing is to become competitive and to dilute the economy’s dependence on oil rents – growth in this sector mostly ceased by 2008, and as of December 2008 was down by 25.4% from December 2007. Devaluation is also needed to narrow an awning budget deficit some expect to exceed 20% of GDP in 2009, a disturbing figure even by recent spendthrift standards.

Now that Chavez won the referendum on the abolition of term limits in February 2009 and given that the next Presidential election is in 2012, there are already signs of a stealth devaluation. Because subsidizing dollars is much harder with oil prices at 50$ instead of 100$ per barrel, the government is limiting the amounts of dollars Venezuelans can buy for foreign travel and are considering doing the same with luxury imports. Though Finance Minister Ali Rodriguez says a devaluation will not happen in 2009, a “multitiered exchange rate” is possible – that is, continuing the current peg only for vital imports such as medicine, food staples, and industrial machinery.

This will keep social discontent to a minimum (for a year or two, Venezuelans will have to live with fewer imported cars and cakes, but they’ll have bread). The boost in inflation will be counteracted by shrinking demand and general global deflation. Furthermore, Venezuela has low foreign debt, considerable reserves and China is keeping a floor under commodity prices by buying them up on the cheap across the world. Coupled with what already looks like an incipient recovery in emerging Asia, Venezuela, like Russia, should come out of the crisis relatively unscathed, leaner and ready to enjoy a second round of soaring oil prices. Meanwhile, Chavez is continuing to invest in long-term development by pouring money into infrastructure projects like building an extensive railway system – an excellent idea for the post-peak oil world.

Problem – Corruption, Obstacles to SME Growth. Venezuela is ostensibly the 158th most corrupt nation in the world, according to Transparency International. Yet as I noted in one of my very first articles for Da Russophile, Reading Russia Right:

While there’s no denying Russia is plagued by corruption, to suggest it is endemic like in a failed state is ludicrous – and would frankly be obvious to anyone who has visited the countries on that list. The problem with the CPI is that it’s a survey of outsider businesspeople and their subjective perception of the situation. While improving perceptions is an important goal, it does not necessarily correlate perfectly with reality. TI’s Global Corruption Barometer asks ordinary people how affected they are by corruption, for instance, have you paid a bribe to obtain a service this year? In 2007, 17% of Russians did – putting them into the same quintile as Bulgaria, Turkey and the Czech Republic. In other words, slap bang in the middle of world corruption, rather than at the end.

Pretty much the same argument can be made with Venezuela. In 2007, only 12% of Venezuelans paid a bribe to obtain services, basically the same proportion as the supposedly much cleaner Czechs.

The root cause of this is the sheer amount of restrictions on business in Venezuela – it comes 171st in Ease of Doing Business rankings. In this atmosphere, doing business in full compliance with all the laws and regulations is nigh impossible and forces enterprises into a constant search for shortcuts by reaching understandings with regional bureaucrats. This distorts the economy, dissuades investors and reduces the potential rate of economic convergence with the developed world. And lowers its position on the Corruption Perceptions Index

Yet ultimately, the important thing is to get stuff built – parasites skimming 10% off a project is regrettable, but not catastrophic. As long as a developing country has basic market mechanisms, a semblance of macroeconomic stability, an open economy and most importantly, high human capital, its economy will converge to developed country levels. Many deeply corrupt and bureaucratized countries (Italy immediately springs to mind) managed the transition and fell into economic stasis only after they got rich.

The current preference for short-term social gratification in place of faster diversification through manufacturing is lamentable, but perhaps unavoidable. Chavez operates under the same political constraints that conditioned the classical Latin American caudillo. Maintaining the acquiescence of the statist bourgeoisie, if not their active support, is key to retaining power, given their control over the traditionally tightly intertwined business-bureaucratic-military complex. It appears to me that this structure is being rapidly dismantled in Venezuela since 2003. (Paradoxically, by constructing a new elite drawn from the younger, educated proletariat, Chavez may well end up ushering in the conditions for a leaner, more effective capitalist economy).

Sociological speculations aside, it is however indisputable that Chavez is building the future more actively than any previous Venezuelan leader – despite the cancerous growth of bureaucracy, socialist tendencies and failure to reform the economy on his watch.

Problem – Crime. I am always skeptical about attributing crime trends, positive or adverse, to governments. They can influence them but can’t control them, for they depend on a great many variables inter-connected in ways little understood even by modern criminologists. That said, I thought it would be instructive to actually plot out Venezuela’s notoriously high homicide rates against other Latin American nations.

First, even by the time Chavez was inaugurated President in February 1999, Venezuelan homicide rates had a long, secular trend towards growth, much like Brazil and Jamaica.

Second, they peaked in 2003, at the end of a turbulent period of opposition-instigated anarchy. Since then homicide rates fell slightly, but it seems from the graph of Colombia that once entrenched, high homicide rates are very hard to reverse.

Third, there are allegations that the Venezuelan state contributes to the high homicide rates with its supposedly lax policies towards the “war on drugs”. Right-wing commentators lambast Chavez, left-wing commentators lambast the CIA, and in general the situation seems shady and unclear. I will not comment on these angry accusations and conspiracy theories (which might be true, who knows?) except to state the obvious and recommend global drug legalization.

Fourth, many of the big cities where crime is concentrated are actually run by opposition mayors.

Along with the likes of Colombia, South Africa and Iraq, the chances of violent death in Venezuela today are typical of a medieval society. By my rough calculations, at current rates every thirtieth Venezuelan can expect to be murdered during his or her lifetime. You really don’t want to be a young man living in a seedy Caracas slum nowadays…

Crime is no doubt a huge problem in Venezuela requiring the utmost attention and possibly draconian measures. Which will not happen, as Chavez is far too humanistic for that, and tradition-bound; Venezuela abolished the death penalty way back in 1863…

Problem? – Authoritarianism. Even Freedom House, a notoriously compromised organization, refrains from labeling Venezuela as Not Free. According the Economist Democracy Index, it is a hybrid regime much like that of Russia, Turkey or Georgia – neither a traditional liberal democracy nor an authoritarian state. The Polity IV Project, an academic database tracking democracy trends since the end of the Second World War, gives Venezuela 5 on a scale ranging from -10 (full autocracy) to 10 (full democracy). I suggest reading their 2007 Venezuela Report to anyone genuinely interested in its political status – their main complaint is on weak executive constraints.

Furthermore, democracy is no panacea. Chavez may have increased his personal power and perhaps this trend will intensify, yet he empowered communities by expanding local democracy, education and healthcare. Much of Latin America is enmeshed into backward, class-ridden systems wherein minuscule middle classes exploit the state to serve their own ends, while keeping the masses suppressed by neglect, ignorance, poverty and religion. Chavez is breaking Venezuelans free of this unholy matrix.

I once talked on a plane with a Venezuelan who lamented on the idleness and lack of curiosity of the people, and about how the equivalent of a small town is murdered there every year. Sounds to me like they need a good dose of revolutionary fervor directed towards building up the country. Hopefully the Bolivarian Revolution will sweep away the oligarchic degenerates into political irrelevance and Chavez will use the opportunity to build a modern industrial economy and reinstall liberal democracy once the heavy lifting is finished.

Yet in any case the US should not concern itself over his democratic or human rights credentials, be they fair or foul. Venezuela has Latin America’s biggest reserves of oil and its Orinoco tar sands could potentially hold as much oil equivalent as Saudi Arabia (though being hard to exploit they are worth much less). Although it exports much of its oil to the US, the Chinese have recently been getting in on the action in a big way, as part of their global strategy of locking up diminishing natural resources to fuel industrialization for a few more decades. Cutting off a major part of America’s economic lifeblood at a time of peaking global oil extraction in the service of abstract concepts like democracy is strategic folly.

Overthrowing Chavez and installing a pliant satrap is no longer realistic – the Venezuelan state is now stronger, Chavez is popular and the opposition is viewed as venal and discredited in the eyes of voters. Even from a military perspective, intervention is politically unacceptable and in any case becoming riskier year by year as the Bolivarian republic plows part of its oil windfalls into acquiring modern diesel submarines, air defense systems and Sukhoi fighter jets from Russia – a relatively cheap and effective way of negating American CVBG diplomacy.

Finally, in any case Venezuela has, interesting enough, the most positive outlook on the US of any major Latin American country – Chavez’s tirades to the contrary. This should provide further incentives for cooperation rather than conflict.

(Republished from Sublime Oblivion by permission of author or representative)
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Chavez is frequently shafted in the Western media, who allege that the only reason the Venezuelan economy is doing well is because of record oil prices. This is not to mention all the invective hurled against the Chavez administration for its supposed disrespect for democracy, from refusing to renew the licenses of TV stations support foreign-sponsored coup attempts against him (while ignoring human rights violation in friendly countries in the region like Colombia, where more union workers are killed annually in than in the rest of the world combined) to the latest smear job by the Economist about crime.

But let’s focus on the economic-boom-is-because-of-oil mantra. Having disproved similar claims about Russia, I decided to investigate this further. Novel Prize winning economist Stiglitz has praised Venezuela’s economic policies. And I found this excellent paper, Update: The Venezuelan Economy in the Chávez Years by Mark Weisbrot and Luis Sandoval from 2008. I’ve quoted its main findings.

Venezuela has experienced very rapid growth since the bottom of the recession in 2003, and grew by 10.3 percent in 2006 and about 8.4 percent last year. The most commonly held view of the current economic expansion is that it is an “oil boom” driven by high oil prices, as in the past, and is headed for a “bust.” The coming collapse is seen either as a result of oil prices eventually declining, or the government’s mismanagement of economic policy.
There is much evidence to contradict this conventional wisdom. Venezuela suffered a severe economic growth collapse in the 1980s and 1990s, with its real GDP peaking in 1977. In this regard it is similar to the region as a whole, which since 1980 has suffered its worst long-term growth performance in more than a century. Hugo Chávez Frías was elected in 1998 and took office in 1999, and the first four years of his administration were plagued by political instability that had a large adverse impact on the economy. (See Figure 2). This culminated in a military coup that temporarily toppled the constitutional government in April 2002, followed by a devastating oil strike in December 2002-February 2003. The oil strike sent the economy into a severe recession, during which Venezuela lost 24 percent of GDP.

But in the second quarter of 2003, the political situation began to stabilize, and it has continued to stabilize throughout the current economic expansion. The economy has had continuous rapid growth since the onset of political stability. Real (inflation-adjusted) GDP has grown by 87.3 percent since the bottom of the recession in 2003. It is likely that the government’s expansionary fiscal and monetary policies, as well as exchange controls, have contributed to the current economic upswing. Central government spending increased from 21.4 percent of GDP in 1998 to 30 percent in 2006. Real short-term interest rates have been negative throughout all or most of the recovery (depending on the measure—see Figure 4).

The government’s revenue increased even faster than spending during this period, from 17.4 to 30 percent of GDP over the same period, leaving the central government with a balanced budget for 2006. The government has planned
conservatively with respect to oil prices: for example, for 2007, the budget planned for oil at $29 per barrel, compared to an average price of $65.20 dollars per barrel for Venezuelan crude last year.
The government has typically exceeded planned spending as oil prices come in higher than the budgeted price, so it is possible that spending would be reduced if oil prices decline.

The Chávez government has greatly increased social spending, including spending on health care, subsidized food, and education. The most pronounced difference has been in the area of health care. For example, in 1998 there were 1,628 primary care physicians for a population of 23.4 million. Today, there are 19,571 for a population of 27 million. The Venezuelan government has also
provided widespread access to subsidized food. By 2006, there were 15,726 stores
throughoutthe country that offered mainly food items at subsidized prices (with
average savings of 27 percent and 39 percent compared to market prices in 2005 and 2006, respectively).

The poverty rate has been cut in half from its peak of 55.1 percent in 2003 to 27.5 percent in the first half of 2007, as would be expected in the face of the very rapid economic growth during these years. (See Table 3). If we compare the pre-Chávez poverty rate (43.9 percent) with the first half of 2007 (27.5 percent) this is a 37 percent drop in the rate of poverty. However this poverty rate does not take into account the increased access to health care or education that poor people have experienced. The situation of the poor has therefore improved significantly beyond even the substantial poverty reduction that is visible in the official poverty rate, which measures only cash income.

Inflation itself is a problem, now running at 22.5 percent. But it should be emphasized that double-digit inflation rates in a developing country such as Venezuela are not comparable to the same phenomenon occurring in the United States or Europe. Inflation in Venezuela was much higher in the pre Chávez years, running at 36 percent in 1998 and 100 percent in 1996. It has fallen through most of the current recovery, from 40 percent annual rate (monthly, year-over-year) at the peak of the oil strike in February 2003 to 10.4 percent in May 2006, before climbing again to its present rate (see Figure 3).

Because of its large current account surplus, large reserves, and low foreign debt, the government has a number of tools available to stabilize and reduce inflation – as well as eventually bring the currency into alignment – without sacrificing the growth of the economy. It appears the government is committed to maintaining a high rate of growth, in addition to its other goals. Venezuela is also well-situated to withstand negative external shocks, including a likely U.S. recession or even a serious global slowdown, a significant drop in the price of oil, and problems in the international credit and financial system. Therefore, at present it does not appear that the current economic expansion is about to end any time in the near future.

In sum, the performance of the Venezuelan economy during the Chávez years does not fit the mold of an “oil boom headed for a bust.” Rather it appears that the economy was hit hard for the first few years by political instability, and has grown rapidly since the political situation stabilized in the first quarter of 2003. High oil prices have certainly contributed to this growth, as has the government’s expansionary fiscal and monetary policy. Containing and reducing inflation, as well as realigning the domestic currency, appear to be the most important challenges in the intermediate run; in the long run, diversifying the economy away from its dependence on oil is also a major challenge.

However, the declining public debt (as a percentage of GDP), the large current account surplus, and the accumulation of reserves have given the government considerable insurance against a decline in oil prices. This favorable macroeconomic situation has also left the government with much flexibility in dealing with inflation and the related imbalance in the exchange rate. Since the government is committed to maintaining solid growth, it does not seem likely
that it would sharply curtail economic growth in order to bring down inflation, as is often done. This is especially true since it has not exhausted other alternatives. Venezuela is also well-situated to withstand negative external shocks, including a likely U.S. recession or even a serious global slowdown, a significant drop in the price of oil, and problems in the international credit and financial system. Therefore, at present it does not appear that the current economic expansion is about to end any time in the near future. The gains in poverty reduction, employment, education and health care that have occurred in the last few years are likely to continue along with the expansion.

A few more remarks.

1. Yes, Venezuela has become more oil-intensive as measured by its (nominal) GDP figures during Chavez’ rule. However, this is because oil has exploded in price. In real terms, oil production has actually been in decline and a weight on GDP growth; the biggest growth, by sector, was in construction, mining, utilities, retail, finance, transport and communications. I.e., pretty much everything except oil.

As put by the Council on Foreign Relations, “critics of Chavez think he should be pouring money into infrastructure to ensure a sustainable oil industry rather than allocating so much for social and foreign policy initiatives.” While that is certainly in American and oil-importing countries’ interests, that does not apply to ordinary Venezuelans.

But that’s beside the point, because the reason Venezuelan oil production is in decline is not that the state-owned oil company, PDVSA, has been supposedly stuffed by incompetent Bolivarian ideologues, burdened by non-oil related social and industrial obligations and had its share increased in “strategic associations” (between PDVSA and foreign companies) from 40% to 60%.

While the three above factors have played apart, it all ultimately comes down to peak oil. All the big discoveries were made before 1960 (which led to the first oil peak in 1970) and, with the exception of a small blip in the mid-1980′s (which, together with modernization and deregulation led to the second oil peak in the late 1990′s), have now ceased. And from now on it is predicted Venezuela’s oil production will be in continuous, relentless decline, following in the footsteps of countries like the US itself.

As an aside, the Orinoco fields are not a solution. The only place in the world where heavy oil refining is a major enterprise are the tar sands in Canada, which have not delivered impressive results despite the huge amounts of fresh water, natural gas and capital expended on them.

2. The most comprehensive (and non-hysterical) critique of Chavez is An Empty Revolution: The Unfulfilled Promises of Hugo Chávez by Francisco Rodríguez, who worked for a time Consolidated Social Fund, clashed with the administration and was eventually ousted. A condensed version was reprinted in the IHT.

He attacks the root of the Chavistas’ claims to superiority, claiming that ‘the “Chávez is good for the poor” hypothesis is wrong’. Basically, he suggests that even in those areas where things didn’t get worse (scarcities, access to running water, percentage of underweight babies, wealth unequality, etc), poverty reduction, illiteracy, infant mortality and spending on education and housing would not have been any worse without his presence. In other words, the oil windfall was mismanaged.

3. On the other hand Weisbrot immediately wrote a (convincing) rebuttal of the above claims in An Empty Research Agenda: The Creation of Myths About Contemporary Venezuela, showing most of those claims to be either half-truths or outright falsehoods.

(Republished from Da Russophile by permission of author or representative)
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.